IFRS for SMEs (2009) + Q&As

IFRS Foundation: Training Material for the IFRS for SMEs

Module 23 Revenue

IFRS Foundation: Training Material

for the IFRS for SMEs
including the full text of
Section 17 Property, Plant and Equipment
of the International Financial Reporting Standard (IFRS)
for Small and Medium-sized Entities (SMEs)
issued by the International Accounting Standards Board on 9 July 2009
with extensive explanations, self-assessment questions and case studies

IFRS Foundation
30 Cannon Street
London EC4M 6XH
United Kingdom
Telephone: +44 (0)20 7246 6410
Fax: +44 (0)20 7246 6411
Email:[email protected]
Publications Telephone: +44 (0)20 7332 2730
Publications Fax: +44 (0)20 7332 2749
Publications Email: [email protected]
Web: www.ifrs.org
IFRS Foundation: Training Material for the IFRS for SMEs (version 2010-2)

This training material has been prepared by IFRS Foundation education staff. It has not been approved by the International
Accounting Standards Board (IASB). This training material is designed to assist those training others to implement and
consistently apply the IFRS for SMEs. For more information about the IFRS education initiative please visit
www.ifrs.org/Use+around+the+world/Education/Education.htm.
All rights, including copyright, in the content of this publication are owned by the IFRS Foundation.
Copyright 2013 IFRS Foundation
30 Cannon Street | London EC4M 6XH | United Kingdom |Telephone: +44 (0)20 7246 6410
Email: [email protected] | Web: www.ifrs.org
Disclaimer: The IFRS Foundation, the authors and the publishers do not accept any responsibility for any loss caused to any
person and/or entity that acted or refrained from acting in reliance on the material in this publication, whether such loss is
caused by negligence or otherwise. Any names of individuals, companies and/or places used in this publication are fictitious
and any resemblance to real people, entities or places is purely coincidental.
Right of use
Although the IFRS Foundation encourages you to use this training material for educational purposes, you must do so in
accordance with the terms of use below. For details on using our standards please visit www.ifrs.org/IFRSs/Pages/IFRS.aspx
Please note the use of this training material (as set out in the terms of use) is not subject to the payment of a fee and we
reserve the right to change the terms of use from time to time.
Your right (if any) to use this training material will expire:

when this training material becomes out of date at which time you must cease to use it and/or to make it
available; and/or

if you breach the terms of use.

1. Terms of Use
1.1 This training material may only be used for educational purposes and in accordance with these terms. If you require
any other use, please contact us as you will need a written licence which we may or may not grant.
Printed Use.
1.2 Unless you are reproducing the training material in whole or in part to be used in a hard copy stand-alone document,
you must not use or reproduce, or allow anyone else to use or reproduce, any trademarks that appear on or in the
training material.
1.3 For the avoidance of any doubt, you must not use or reproduce any trademark that appears on or in the training
material if you are using all or part of the training material to incorporate into your own documentation.
1.4 The trademarks include, but are not limited to, the IFRS Foundation and IASB names and logos.
1.5 When you copy any extract, in whole or in part, from this publication in print form, you must ensure that:
the documentation includes a copyright acknowledgement;
the documentation includes a statement that the IFRS Foundation is the source of the material;
the documentation includes an appropriate disclaimer;
our status as the author(s) of the teaching materials is acknowledged;
the extract is shown accurately; and
the extract is not used in a misleading context.
Electronic Use.
1.6 In relation to any electronic use of this training material:
if you intend to provide this training material (in whole) through your website you may only do so by providing a
link to our website. Please see www.ifrs.org/Pages/Terms-and-Conditions.aspx for details of how you can link to our
website
if you intend to include any part of this training material on your website free of charge or in a slide pack for an
educational course you must comply with the provisions listed at paragraph 1.5 and you must not use or reproduce,
or allow anyone else to use or reproduce, any trademarks that appear on or in the training material
if you intend to provide any part of this training material electronically for any other purpose please contact us as
you will need a written licence which we may or may not grant
If you breach any of these terms of use your right (if any) to use our materials will cease immediately and you must, at our
option, return or destroy any copies of the materials you have made.
Please address publication and copyright matters to:
IFRS Foundation Publications Department | 30 Cannon Street | London EC4M 6XH | United Kingdom | Telephone: +44 (0)20
7332 2730 | Email: [email protected] Web: www.ifrs.org

Trade Marks

The IFRS Foundation logo, the IASB logo, the IFRS for SMEs logo, the Hexagon Device, IFRS Foundation, eIFRS, IAS,
IASB, IASC Foundation, IASCF, IFRS for SMEs, IASs, IFRS, IFRSs, International Accounting Standards and
International Financial Reporting Standards are Trade Marks of the IFRS Foundation.

IFRS Foundation: Training Material for the IFRS for SMEs (version 2010-2)

Contents

INTRODUCTION __________________________________________________________
Learning objectives ________________________________________________________
IFRS for SMEs ____________________________________________________________
Introduction to the requirements_______________________________________________

1
1
2
2

REQUIREMENTS AND EXAMPLES ___________________________________________ 5

Scope of this section _______________________________________________________ 5
Measurement of revenue ____________________________________________________ 6
Identification of the revenue transaction________________________________________ 14
Sale of goods ____________________________________________________________ 17
Rendering of services______________________________________________________ 21
Construction contracts _____________________________________________________ 25
Percentage of completion method ____________________________________________ 34
Interest, royalties and dividends ______________________________________________ 43
Disclosures ______________________________________________________________ 45
AppendixExamples of revenue recognition under the principles in Section 23 ________ 50
Sale of goods ____________________________________________________________ 50
Rendering of services______________________________________________________ 53
Franchise fees ___________________________________________________________ 54
Interest, royalties and dividends ______________________________________________ 55
SIGNIFICANT ESTIMATES AND OTHER JUDGEMENTS _________________________ 57
Recognition _____________________________________________________________ 57
Measurement ____________________________________________________________ 58
COMPARISON WITH FULL IFRSs ___________________________________________ 59
TEST YOUR KNOWLEDGE ________________________________________________ 60
APPLY YOUR KNOWLEDGE _______________________________________________
Case study 1 ____________________________________________________________
Answer to case study 1 ____________________________________________________
Case study 2 ____________________________________________________________
Answer to case study 2 ____________________________________________________

IFRS Foundation: Training Material for the IFRS for SMEs (version 2010-2)

66
66
67
70
71

iv

Module 23 Revenue

This training material has been prepared by IFRS Foundation education staff and has
not been approved by the International Accounting Standards Board (IASB).
The accounting requirements applicable to small and medium-sized entities (SMEs) are
set out in the International Financial Reporting Standard (IFRS) for SMEs, which was
issued by the IASB in July 2009.

INTRODUCTION
This module, updated in January 2013, focuses on the accounting and reporting of revenue in
accordance with Section 23 Revenue of the IFRS for SMEs that was issued in July 2009 and the
related non-mandatory guidance subsequently provided by the IFRS Foundation SME
Implementation Group.. It introduces the learner to the subject, guides the learner through
the official text, develops the learners understanding of the requirements through the use of
examples and indicates significant judgements that are required in accounting for revenue.
Furthermore, the module includes questions designed to test the learners knowledge of the
requirements and case studies to develop the learners ability to account for revenue in
accordance with the IFRS for SMEs.

Learning objectives

Upon successful completion of this module you should know the financial reporting
requirements for revenue in accordance with the IFRS for SMEs as issued in July 2009.
Furthermore, through the completion of case studies that simulate aspects of the real world
application of that knowledge, you should have enhanced your ability to account for revenue
in accordance with the IFRS for SMEs. In particular you should, in the context of the IFRS for
SMEs, be able:

to identify when revenue arising from specific transactions and events qualifies for
recognition in financial statements in accordance with Section 23

to measure revenue arising from the sale of goods, the rendering of services, the exchange
of goods or services and the use by others of entity assets yielding interest, royalties or
dividends

to account for revenues and costs associated with construction contracts

to present and disclose revenue and construction contracts in financial statements

to demonstrate an understanding of the significant judgements that are required in

accounting for revenue and construction contracts.

IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

Module 23 Revenue
IFRS for SMEs
The IFRS for SMEs is intended to apply to the general purpose financial statements of entities
that do not have public accountability (see Section 1 Small and Medium-sized Entities).
The IFRS for SMEs includes mandatory requirements and other material (non-mandatory) that is
published with it.
The material that is not mandatory includes:

a preface, which provides a general introduction to the IFRS for SMEs and explains its
purpose, structure and authority.

implementation guidance that includes illustrative financial statements and a disclosure

checklist.

the Basis for Conclusions, which summarises the IASBs main considerations in reaching
its conclusions in the IFRS for SMEs.

the dissenting opinion of an IASB member who did not agree with the publication of the
IFRS for SMEs.

In the IFRS for SMEs the Glossary is part of the mandatory requirements.
In the IFRS for SMEs there are appendices in Section 21 Provisions and Contingencies, Section 22
Liabilities and Equity and Section 23 Revenue. Those appendices are non-mandatory guidance.
Further, the SME Implementation Group (SMEIG), responsible for assisting the IASB on matters
related to the implementation of the IFRS for SMEs, published implementation guidance in
the form of questions and answers (Q&As). The Q&As are intended to provide non-mandatory
and timely guidance on specific accounting questions that are being raised with the SMEIG by
users implementing the IFRS for SMEs.
When the IFRS for SMEs was issued in July 2009, the IASB undertook to assess entities
experience of applying the IFRS for SMEs following the first two years of application and
consider whether there is a need for any amendments. To this end, in June 2012, the IASB
issued a Request for Information: Comprehensive Review of the IFRS for SMEs. Currently it is expected
that an exposure draft proposing amendments to the IFRS for SMEs will be issued in the first
half of 2013.

Introduction to the requirements

The objective of general purpose financial statements of a small or medium-sized entity is to
provide information about the entitys financial position, performance and cash flows that is
useful for economic decision-making by a broad range of users (eg owners who are not
involved in managing the business, potential owners, existing and potential lenders and other
creditors) who are not in a position to demand reports tailored to meet their particular
information needs. The objective of Section 23 is to specify the financial reporting
requirements for revenue and construction contracts.
Revenue is the gross inflow of economic benefits in the period arising in the course of the
ordinary activities of an entity when those inflows result in increases in equity, other than
increases relating to contributions from equity participants. An exchange for goods or services
of a similar nature and value is not regarded as a transaction that generates revenue.
However, exchanges for dissimilar items are regarded as generating revenue.
IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

Module 23 Revenue
The primary issue in accounting for revenue is determining when to recognise revenue.
Revenue is recognised when it is probable that future economic benefits will flow to the entity
and these benefits can be measured reliably. Section 23 identifies the circumstances in which
these criteria will be met and, therefore, revenue will be recognised. It also provides practical
guidance on the application of these criteria for revenue arising from the sale of goods, the
rendering of services, construction contracts in which the entity is the contractor and the use
by others of entity assets yielding interest, royalties or dividends.
General principles for measurement of revenue
Revenue should be measured at the fair value of the consideration receivable. The fair value of
the consideration received or receivable takes into account the amount of any trade discounts,
prompt settlement discounts and volume rebates allowed by the entity.
When the inflow of cash or cash equivalents is deferred, and the arrangement constitutes in
effect a financing transaction, the fair value of the consideration is the present value of all
future receipts determined using an imputed rate of interest. A financing transaction arises
when, for example, an entity provides interest-free credit to the buyer or accepts a note
receivable bearing a below-market interest rate from the buyer as consideration for the sale of
goods. Interest is recognised using the effective interest method.
General principles for recognition of revenue
Recognition means incorporating an item that meets the definition of revenue in the
statement of comprehensive income (or income statement when the two statement approach
is adopted) when it meets the following criteria:

it is probable that any future economic benefit associated with the item of revenue will
flow to the entity, and

the amount of revenue can be measured with reliability.

The IFRS for SMEs provides guidance for recognising the following specific categories of
revenue:
Sale of goods
Revenue arising from the sale of goods should be recognised when, in addition to the general
principles for recognition of revenue (see above), all of the following criteria have been
satisfied:

the seller has transferred to the buyer the significant risks and rewards of ownership of the
goods;

the seller retains neither continuing managerial involvement to the degree usually
associated with ownership nor effective control over the goods sold; and

the costs incurred or to be incurred in respect of the transaction can be measured reliably.

Rendering of services
Revenue arising from the rendering of services is recognised by reference to the stage of
completion of the transaction at the end of the reporting period (the percentage of completion
method) provided that, in addition to the general principles for recognition of revenue, both
IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

Module 23 Revenue
of the following criteria are met:

the stage of completion of the transaction at the end of the reporting period can be
measured reliably; and

the costs incurred for the transaction and the costs to complete the transaction can be
measured reliably.

When the outcome of the transaction involving the rendering of services cannot be estimated
reliably, revenue should be recognised only to the extent of the expenses recognised that are
recoverable.
Construction contracts
Like revenue from services (see above), when the outcome of a construction contract can be
estimated reliably, contract revenue is recognised by reference to the stage of completion of
the contract activity at the end of the reporting period (often referred to as the percentage of
completion method).
Interest, royalties, and dividends
For interest, royalties and dividends, provided that the general principles for recognition of
revenue are satisfied, revenue should be recognised as follows:

interest: using the effective interest method.

royalties: on an accruals basis in accordance with the substance of the relevant agreement.

dividends: when the shareholders right to receive payment is established.

Identification of the transaction

The recognition criteria are usually applied separately to each transaction. However, in some
circumstances it is necessary to apply the recognition criteria to the separately identifiable
components of a single transaction in order to reflect the substance of the transaction.
For example, when the selling price of a product includes an identifiable amount for
subsequent servicing, that amount is deferred and recognised as revenue over the period in
which the service is performed. These sales are sometimes referred to as multiple element
sales. Conversely, an entity applies the recognition criteria to two or more transactions
together when they are linked in such a way that the commercial effect cannot be understood
without reference to the series of transactions as a whole. The requirements for the
identification of the transaction are consistent with the concept of accounting for the
transactions in accordance with their economic reality rather than their legal form (see
paragraph 2.8).

IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

Module 23 Revenue

REQUIREMENTS AND EXAMPLES

The contents of Section 23 Revenue of the IFRS for SMEs are set out below and shaded grey.
Terms defined in the Glossary of the IFRS for SMEs are also part of the requirements.
Those terms are in bold type the first time they appear in the text of Section 23. The notes
and examples inserted by the IFRS Foundation education staff are not shaded.
Other annotations inserted by the IFRS Foundation staff are presented within square brackets
in bold italics. The insertions made by the staff do not form part of the IFRS for SMEs and have
not been approved by the IASB.

Scope of this section

23.1

This section shall be applied in accounting for revenue arising from the following
transactions and events:
(a) the sale of goods (whether produced by the entity for the purpose of sale or
purchased for resale).
(b) the rendering of services.
(c) construction contracts in which the entity is the contractor.
(d) the use by others of entity assets yielding interest, royalties or dividends.

Notes
Income is increases in economic benefits in 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 participants. Income
encompasses both revenue and gains.
Revenue is the gross inflow of economic benefits in the period arising in the course of
the ordinary activities of an entity when those inflows result in increases in equity,
other than increases relating to contributions from equity participants.
Revenue is income that arises in the course of ordinary activities of an entity and is
referred to by a variety of different names including sales, fees, interest, dividends,
royalties and rent. Gains are other items that meet the definition of income but are
not revenue (see paragraph 2.25(b)). Example 1 below provides useful guidance in
differentiating revenue from gains.
Proceeds from the disposal of property, plant and equipment shall not be classified as
revenue (see paragraph 17.28). The sale of property, plant and equipment would be
reported net in the statement of comprehensive income (ie the gain or loss on
disposal). The gain or loss would not be reported in revenue. It is important for users
of financial statements to see such gains separately from revenue arising from an
entitys sale of goods when evaluating an entitys past and future financial
performance. This is because revenue from the sale of goods typically recurs on an
ongoing basis in comparable amounts, whereas the disposal of an item of property,
plant and equipment usually gives rise to one-off, non-recurring income.
IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

Module 23 Revenue
Example revenue
Ex 1

A chain of bicycle shops holds bicycles for short-term hire and for sale. The bicycles
available for hire are used for two or three years and then sold by the shops as
second-hand models.
All shops sell both new and second-hand bicycles.
The shops have three sources of revenue: (i) the sale of new bicycles, (ii) the sale of
second-hand bicycles and (iii) the rental of bicycles.
The sale of a second-hand bicycle is not a disposal of property, plant and equipment,
even though the bicycle is held for use by the shops for a number of years in their hire
business. The bicycle shops are in the business of selling both new and second-hand
bicycles. Therefore selling second-hand bicycles is part of the shops ordinary, recurring
activities and hence such sales represent revenue.

23.2

Revenue or other income arising from some transactions and events is dealt with in other
sections of this IFRS:
(a) lease agreements (see Section 20 Leases).
(b) dividends and other income arising from investments that are accounted for using the
equity method (see Section 14 Investments in Associates and Section 15 Investments
in Joint Ventures).
(c) changes in the fair value of financial assets and financial liabilities or their
disposal (see Section 11 Basic Financial Instruments and Section 12 Other Financial
Instruments Issues).
(d) changes in the fair value of investment property (see Section 16 Investment
Property).
(e) initial recognition and changes in the fair value of biological assets related to
agricultural activity (see Section 34 Specialised Activities).
(f) initial recognition of agricultural produce (see Section 34).

Measurement of revenue
23.3

An entity shall measure revenue at the fair value of the consideration received or
receivable. The fair value of the consideration received or receivable takes into account
the amount of any trade discounts, prompt settlement discounts and volume rebates
allowed by the entity.

Notes
Fair value is the amount for which an asset could be exchanged, a liability settled, or
an equity instrument granted could be exchanged, between knowledgeable, willing
parties in an arms length transaction.

IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

Module 23 Revenue
Examples measurement of revenue
Ex 2

A manufacturer sells one of its products for CU500 (1) per unit. However, the
manufacturer gives customers a 20 per cent discount on orders of 100 units or
more. A customer buys 100 units in a single order.
The manufacturer must measure revenue from the sale of goods at CU40,000,
ie 100 units (CU500 list price less CU100 (ie 20% CU500) volume discount).

Ex 3

A manufacturer sells one of its products for CU500 per unit. However, the
manufacturer gives customers a 20 per cent discount on orders of 100 units or
more. Furthermore, when the customer has purchased 1,000 or more units in a
single annual financial reporting period, the retailer awards the customer a further
volume discount of 10 per cent of the list price for all units acquired by the
customer in that financial year.
A customer buys 100 units of the product each month for one annual financial
reporting period.
The manufacturer must measure the total revenue from the sale of goods to the
customer in that annual period at CU420,000, ie 1,200 units (CU500 list price less
CU150 (ie 30% CU500) volume discount).
The trade rebate is not intended as a financing transaction and it is unlikely that the
time value of money is material. Therefore the manufacturer should recognise revenue
at the amount paid net of the total volume rebate (ie no discounting).

Ex 4

A manufacturer sells one of its products for CU500 per unit on credit. To encourage
early settlement the retailer awards its customers a 10 per cent early settlement
discount provided that the customer settles within 30 days of buying the goods.
Normal credit terms are 60 days.
Customer 1 pays CU40,500, within 30 days of the date of purchase, to settle the
amount owing for 90 units bought from the entity.
Customer 2 pays CU45,000, 60 days after the date of purchase, to settle the amount
owing for 90 units bought from the entity.
The retailer must measure revenue from the sale of goods to customer 1 at CU40,500
(ie 90 units (CU500 list price less 10% CU500 early settlement discount)) and revenue
from the sale of goods to customer 2 at CU45,000 (ie 90 units CU500 list price).

Ex 5

A retailer sells one of its products for CU500 per unit. On one occasion the retailer
exchanged 10 units of the product as payment for 10 man-hours of accounting
services from a partner of an international accounting firm. The accounting
services received are available to the accounting firms clients at CU500 per hour.
The retailer must measure revenue from the sale of goods at CU5,000 (ie 10 man-hours
CU500 per hour (see also paragraphs 23.6 and 23.7)).

(1)

In this example, and in all other examples in this module, monetary amounts are denominated in currency units (CU).

IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

Module 23 Revenue
23.4

An entity shall include in revenue only the gross inflows of economic benefits received
and receivable by the entity on its own account. An entity shall exclude from revenue all
amounts collected on behalf of third parties such as sales taxes, goods and services
taxes and value added taxes. In an agency relationship, an entity shall include in revenue
only the amount of its commission. The amounts collected on behalf of the principal are
not revenue of the entity.

Notes
In an agency relationship, the gross inflows of economic benefits include amounts
collected on behalf of the principal. However, only the part of the gross inflow that is
commission for the agent is included in the revenue of the agent.
Determining whether an entity is acting as a principal or as an agent depends on facts
and circumstances and requires judgement. An entity is acting as a principal when it
has exposure to the significant risks and rewards associated with the sale of goods or
the rendering of services.
Features that, individually or in combination, indicate that an entity is acting as a
principal include:
(a)

the entity has the primary responsibility for providing the goods or services to
the customer or for fulfilling the order, for example by being responsible for
the acceptability of the products or services ordered or purchased by the
customer;

(b)

the entity has inventory risk before or after the customer order, in shipping or
on return;

(c)

the entity has discretion in establishing prices, either directly or indirectly, for
example by providing additional goods or services;

(d)

the entity bears the customers credit risk.

An entity is acting as an agent when it does not have exposure to the significant risks
and rewards associated with the sale of goods or the rendering of services. One feature
indicating that an entity is acting as an agent is that the amount the entity earns is
predetermined, being either a fixed fee per transaction or a stated percentage of the
amount billed to the customer.

IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

Module 23 Revenue
Examples transactions with third parties
Ex 6

A manufacturer sells goods to its customers through an intermediary.

The intermediary holds the goods on consignment from the manufacturer.
The intermediary may return any goods not sold to the manufacturer.
The manufacturer instructs the intermediary to sell the goods at CU100 per unit.
The intermediary deducts fixed commission of CU10 for each unit sold and
transfers the balance (CU90) to the manufacturer. If goods are found to be
defective, the customers must return the goods to the manufacturer for repair or
replacement.
The manufacturer is acting as a principal for the sale to the customers as it has exposure
to the significant risks and rewards associated with the sale of goods (eg inventory
obsolescence, defective goods returned, setting sales price etc). The manufacturer is
required to measure revenue from the sale of goods at CU100 for each unit of the goods
sold by its agent (the intermediary). The manufacturer should recognise revenue on the
sale on the date the goods are sold to the customers by the intermediary as this is when
the risks and rewards are transferred. The manufacturer must also recognise a warranty
provision (liability) for the limited right of return (see Section 21 Provisions and
Contingencies).
The intermediary is acting as an agent for the manufacturer. It must therefore measure
revenue from the provision of services (sales commission) at CU10 for each unit of goods
sold. The manufacturer must recognise a corresponding expense as commission paid.

Ex 7

A manufacturer sells goods to an intermediary at CU90. The intermediary

purchases the goods for resale to others. Only the intermediary has the right to
return any defective units to the manufacturer. The intermediary wishes to make a
CU10 margin on its sales and so it sells the goods at CU100 per unit to customers.
If goods are found to be defective, the customers must return the goods to the
intermediary for repair or replacement.
The manufacturer must measure revenue from the sale of goods at CU90 for each unit of
goods transferred to the intermediary. The manufacturer must also recognise a
warranty provision (liability) for the limited right of return (see Section 21 Provisions and
Contingencies).
The intermediary is acting as a principal for the sale to the customers as it has exposure
to the significant risks and rewards associated with the sale of goods (eg inventory
obsolescence, defective goods returned, setting sales price etc). The intermediary must
measure revenue from the sale of goods at CU100 for each unit of goods sold to the
customers. For each unit sold, the intermediary must recognise an expense of CU90 for
cost of goods sold.

Ex 8

A retailer sells goods for CU100 per unit, inclusive of CU10 sales tax (eg VAT) that it
collects on behalf of the national government.
The retailer must measure revenue at CU90 for each unit sold (ie CU100 list price less
CU10 collected on behalf of the government). The retailer is acting as an agent in the
collection of VAT on behalf of the government and hence the VAT is not included in
revenue.

IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

Module 23 Revenue
Ex 9

A tobacconist sells cigars for CU10 per unit, inclusive of CU4 tobacco levy that it
collects on behalf of the national government. The tobacco levy is paid to the
government by the end of the month following the month in which the cigarette is
sold. However, if the customer defaults, the tobacconist is entitled to reclaim the
tobacco levy from the government.
The tobacconist must measure revenue at CU6 for each unit sold (ie CU10 list price less
CU4 collected on behalf of the government).

Ex 10 The facts are the same as in example 9. However, in this example, the CU4 tobacco
levy is based on the number of cigars that the tobacconist produces in the month (ie
the levy is payable by the tobacconist irrespective of whether the cigars are sold).
Furthermore, when a customer defaults, the tobacconist cannot reclaim the tobacco
levy from the government.
The tobacconist must measure revenue at CU10 for each unit sold and recognise the levy
in profit or loss of the period in which the cigar is produced. In this example the tobacco
levy is a production tax.

Deferred payment
23.5

When the inflow of cash or cash equivalents is deferred, and the arrangement constitutes
in effect a financing transaction, the fair value of the consideration is the present value of
all future receipts determined using an imputed rate of interest. A financing transaction
arises when, for example, an entity provides interest-free credit to the buyer or accepts a
note receivable bearing a below-market interest rate from the buyer as consideration for
the sale of goods. The imputed rate of interest is the more clearly determinable of either:
(a) the prevailing rate for a similar instrument of an issuer with a similar credit rating, or
(b) a rate of interest that discounts the nominal amount of the instrument to the current
cash sales price of the goods or services.
An entity shall recognise the difference between the present value of all future receipts
and the nominal amount of the consideration as interest revenue in accordance with
paragraphs 23.28 and 23.29 and Section 11.

Notes
The present value is the current estimate of the present discounted value of the future
net cash flows in the normal course of business.
If the imputed rate of interest is determined as a rate of interest that discounts the
nominal amount of the instrument to the current cash sales price of the goods or
services (ie paragraph 23.5(b) is the more clearly determinable), the resulting interest
rate should be assessed for reasonableness. If the rate appears unusually low (taking
account of for example the time value of money and the credit worthiness of the
buyer), this could mean that the current cash sales price has not been properly
identified for that particular customer.

IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

10

Module 23 Revenue
Examples deferred payment
Ex 11 An entity sells goods under conditions that allow the consideration to be paid by
the customer in instalments.
The entity recognises revenue equal to the fair value of the consideration receivable, at
the date of sale. The fair value of the consideration receivable is the present value of the
instalments. This is determined by discounting the instalments receivable at the
imputed rate of interest. The seller recognises the interest element as interest revenue
using the effective interest method.
Ex 12 On the first day of its annual reporting period an entity sold inventories for
CU2,000,000 on two years interest-free credit when the current cash sales price of
the goods was CU1,652,893.
Since there is a CU347,107 difference between the cash price of CU1,652,893 and the
amount due under the two years interest-free credit arrangement, the arrangement is
in effect a financing transaction as well as the sale of goods. Assuming that the implicit
discount rate is reasonable (considering for example the time value of money and the
credit standing of the customer), the entity must recognise revenue from the sale of
goods on the first day of its annual reporting period of CU1,652,893. Furthermore, the
entity must recognise interest revenue of respectively CU165,289 and CU181,818 in the
current annual reporting period and the next calculated using the effective interest
method as illustrated below.
Using a spreadsheet or a financial calculator, the imputed rate of interest is calculated at
10 per cent per year (ie the rate that discounts the nominal amount (CU2,000,000)
payable in two years time to the current cash sales price of the goods (CU1,652,893)).
The revenue arising from the sale of goods is the current cash selling price CU1,652,893
(ie the present value of the future payment).
Interest revenue for the year of the sale is CU165,289calculation: CU1,652,893 present
value 10 per cent (the imputed rate of interest).
Interest revenue for the next year is CU181,818calculation: (CU1,652,893 present value
+ CU165,289 interest accrued) 10 per centthe imputed rate of interest.
Ex 13 On the first day of its annual reporting period an entity sold inventories for
CU2,000,000 on two years interest-free credit. The entity and its competitors
generally allow customers deferred payment with no interest and hence there are
no recent cash transactions from which the entity could make a reliable estimate of
the cash sales price. The entity estimates that the customer would be able to obtain
financing from other sources at an interest rate of 10 per cent per year.
The entity must recognise revenue from the sale of goods on the first day of its annual
reporting period of CU1,652,893. Furthermore, the entity must recognise interest
revenue of respectively CU165,289 and CU181,818 in the current annual reporting
period and the next.
The imputed rate of interest is 10 per cent per year (ie the prevailing rate for a similar
instrument of an issuer with a similar credit rating).

IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

11

Module 23 Revenue
The revenue arising from the sale of goods is measured at the present value of all future
receipts determined using the imputed rate of interest (10%), ie CU2,000,000 future
payment 1 (1.1)2 = CU1,652,893.
Interest revenue for the year of the sale is CU165,289calculation: CU1,652,893 present
value 10 per cent (the imputed rate of interest).
Interest revenue for the next year is CU181,818calculation: (CU1,652,893 present value
+ CU165,289 interest accrued) 10 per centthe imputed rate of interest.

Exchanges of goods or services

23.6

An entity shall not recognise revenue:

(a) when goods or services are exchanged for goods or services that are of a similar
nature and value, or
(b) when goods or services are exchanged for dissimilar goods or services but the
transaction lacks commercial substance.

Notes
Common examples of goods that are exchanged or swapped for goods of a similar
nature and value are commodities such as oil or milk, of which suppliers exchange or
swap inventories in various locations to fulfil demand on a timely basis in a particular
location.

23.7

An entity shall recognise revenue when goods are sold or services are exchanged for
dissimilar goods or services in a transaction that has commercial substance. In that case,
the entity shall measure the transaction at:
(a) the fair value of the goods or services received adjusted by the amount of any cash or
cash equivalents transferred;
(b) if the amount under (a) cannot be measured reliably, then at the fair value of the
goods or services given up adjusted by the amount of any cash or cash equivalents
transferred; or
(c) if the fair value of neither the asset received nor the asset given up can be measured
reliably, then at the carrying amount of the asset given up adjusted by the amount of
any cash or cash equivalents transferred.

IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

12

Module 23 Revenue
Example revenue on exchange of goods and services
Ex 14 On 1 January 20X1 a gold merchant that had recently acquired an executive jet
received landing rights at a local airport in exchange for 100 ounces of gold, when
gold was trading at CU1,000 per ounce.
The exchange of gold for landing rights is an exchange of dissimilar goods. The gold
merchant must measure revenue from the sale of goods (gold) at CU100,000 (ie this is
considered to be the fair value of the landing rights (the consideration) receivedsee
paragraph 23.3). In this case the fair value of the consideration received in the exchange
transaction is most readily measurable by reference to the fair value of the golda
commodity traded in an active market.
Calculation: 100 ounces of gold CU1,000 per ounce = CU100,000.

Examples no revenue on the exchange of goods and services

Ex 15 On 1 January 20X1, in order to fulfil an urgent order from a customer, fuel
retailer X received 180,000 litres of motor fuel in City A from another fuel retailer Y
in exchange for 180,000 litres of its motor fuel in City B. Motor fuel costs CU1 per
litre.
Fuel retailer X does not recognise revenue arising from the exchange of motor fuel with
fuel retailer Yan exchange of similar goods or services.
Fuel retailer X will recognise revenue when it sells the fuel received in the exchange
transaction to its customers.
Ex 16 An entity operating in the telecommunications industry owns a network that
transmits digital signals. The network comprises fibre optic cables. The entity
commonly enters into capacity swap service contracts with third parties that own
similar networks in other locations. Under one of these contracts, the entity is
required to surrender capacity in its network of a value of CU1 million for a 10-year
period to a third party that operates in the same line of business, in exchange for
the use of a given capacity in the network of that third party.
On the facts, it appears that the capacity in the network is swapped for capacity in
another network of a similar nature and value. Therefore, neither the entity nor the
third party should recognise any revenue (or associated cost) for the transmission
services provided (ie for the capacity given up (received)).

IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

13

Module 23 Revenue
Identification of the revenue transaction
23.8

An entity usually applies the revenue recognition criteria in this section separately to each
transaction. However, an entity applies the recognition criteria to the separately
identifiable components of a single transaction when necessary to reflect the substance of
the transaction. For example, an entity applies the recognition criteria to the separately
identifiable components of a single transaction when the selling price of a product
includes an identifiable amount for subsequent servicing. Conversely, an entity applies
the recognition criteria to two or more transactions together when they are linked in such
a way that the commercial effect cannot be understood without reference to the series of
transactions as a whole. For example, an entity applies the recognition criteria to two or
more transactions together when it sells goods and, at the same time, enters into a
separate agreement to repurchase the goods at a later date, thus negating the
substantive effect of the transaction. [Refer: Appendix to Section 23, example 8]

Examples identification of the revenue transaction

Ex 17 A car dealership sells new cars to customers. Furthermore, as a limited period offer
at no extra charge, the dealer undertakes to maintain the car for three years from
the date of purchase. Normally the dealership charges extra for the maintenance
services and it is possible for a customer to purchase both the car and the
maintenance services separately.
The dealership enters into a sale that has two separately identified elements. In a single
transaction the dealership:
sells a goodthe new car; and
undertakes to provide maintenance services for three years.
The dealership must allocate the fair value of the consideration received (the amount
received from the customer) to the separately identified components of the transaction.
Since the two elements are sold separately, it is possible to allocate the consideration pro
rata based on the fair value of the individual elements when they are sold separately.
Furthermore, it must apply the recognition criteria to the separately identified
components of the transaction (for the sale of the car see paragraphs 23.1023.13 and for
the maintenance services see paragraphs 23.1423.16).
Ex 18 A security firm entered into a contract with a customer to supply a burglar alarm
system (including installation), to service the system for a three-year period from
the date of installation and to provide an armed response to the customer in the
event that the alarm is triggered. The customer is contractually obliged to pay the
security firm CU20,000 three years after the burglar alarm has been installed,
interest-free.
The security firm always installs burglar alarm systems that it sells. It never
installs alarm systems sold by others.

IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

14

Module 23 Revenue
The security firm has entered into a sale that has multiple elements. The sale
transaction has several components:
sale of a good, including installationthe burglar alarm system;
providing alarm system maintenance services;
providing armed response services; and
a financing component related to the payment for the sale and servicing of the
burglar alarm system and for the armed response services provided to the customer
(see paragraph 23.5).
The security firm must allocate the fair value of the consideration receivable from the
customer to the separately identified components of the transaction. Furthermore, it
must apply the recognition criteria to the separately identified components of the
transaction (for the sale of the good see paragraphs 23.1023.13, for the rendering of
services see paragraphs 23.1423.16 and for the financing transaction see
paragraphs 23.2823.29 (a)).
In this case, installation is not treated as a separate component of a transaction because
the customer would not purchase the system without installation and the entity does
not offer installation services if it does not also sell the system. When installation is
incidental to the sale of goods, any fees related to installation are recognised when
goods are sold (see Appendix to Section 23, examples 2 and 14). A seller normally
recognises revenue from the sale of goods when the buyer accepts delivery, and
installation and inspection are complete as that is usually when the significant risks and
rewards of ownership of the goods are transferred (see paragraph 23.10).
Ex 19 A luxury yacht manufacturer sells a yacht to a bank for CU1,000,000 and
simultaneously enters into an agreement to repurchase the yacht from the bank for
CU1,080,000 one year later.
On the date of entering into the transaction, the fair value of the yacht was
CU2,000,000 and the manufacturers incremental borrowing rate approximated 8
per cent per year.
The bank does not have the right to sell the yacht.
The yacht manufacturer must not recognise revenue from the sale of the yacht.
The substance of the two transactions taken as a whole is that the manufacturer has
borrowed CU1,000,000 from the bank and that borrowing is secured by the
manufacturers yacht (inventory asset). Accordingly, the manufacturer must recognise
the CU1,000,000 received from the bank as a secured liability and the yacht must remain
in the manufacturers inventories.
The CU80,000 (excess of the CU1,080,000 repurchase price over the CU1,000,000 selling
price) must in accordance with Section 11 Basic Financial Instruments be recognised as
finance costs over the period of the loan on the effective interest method.
Ex 20 The facts are the same as in example 19. However, in this example, the
manufacturer has an option (not an obligation) to repurchase the yacht from the
bank for CU1,080,000 one year after the sale.

IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

15

Module 23 Revenue
Because the fair value of the yacht in significantly higher than the strike price of the
option to repurchase the yacht, the manufacturer is most unlikely to let the option
lapse. Therefore, the substance of the two transactions taken as a whole is that the
manufacturer has borrowed CU1,000,000 from the bank and that borrowing is secured
by the manufacturers yacht (inventory asset). Accordingly, the manufacturer must
recognise the CU1,000,000 received from the bank as a secured liability and the yacht
must remain in the manufacturers inventories.
The CU80,000 (excess of the CU1,080,000 repurchase price over the CU1,000,000 selling
price) must in accordance with Section 11 Basic Financial Instruments be recognised as
finance costs over the period of the loan on the effective interest method.

23.9

Sometimes, as part of a sales transaction, an entity grants its customer a loyalty award
that the customer may redeem in the future for free or discounted goods or services.
In this case, in accordance with paragraph 23.8, the entity shall account for the award
credits as a separately identifiable component of the initial sales transaction. The entity
shall allocate the fair value of the consideration received or receivable in respect of the
initial sale between the award credits and the other components of the sale.
The consideration allocated to the award credits shall be measured by reference to their
fair value, ie the amount for which the award credits could be sold separately.
[Refer: Appendix to Section 23, example 13]

Examples customer loyalty awards

Ex 21 A grocery retailer operates a customer loyalty programme. It grants programme
members loyalty points when they spend a specified amount on groceries.
Programme members can redeem the points for further groceries. The points have
no expiry date.
By supplying award credits to its customers the grocery retailer enters into multiple
element sales.
The grocery retailer must account for award credits as a separately identifiable
component of the sales transaction in which they are granted (the initial sale). The fair
value of the consideration received or receivable in respect of the initial sale must be
allocated between the award credits and the goods supplied to the customer in the
initial sale. The consideration allocated to the award credits must be measured by
reference to their fair value (ie the amount for which the award credits could be sold
separately).
In accordance with the requirements of paragraphs 23.1023.13 the grocery retailer
must recognise the consideration allocated to award credits as revenue when award
credits are redeemed and it fulfils its obligations to supply awards. The amount of
revenue recognised shall be based on the number of award credits that have been
redeemed in exchange for awards, relative to the total number expected to be redeemed.

IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

16

Module 23 Revenue
Sale of goods

Notes
The primary issue in accounting for revenue from the sale of goods is determining
when to recognise revenue. Paragraph 23.10 specifies conditions that must be satisfied
for revenue from the sale of goods to be recognised. Paragraphs 23.1123.13 provide
mandatory guidance for the application of the specified conditions.
The law in different countries may cause the recognition criteria in paragraph 23.10 to
be met at different times and so the timing of revenue recognition can differ between
countries. However, this does not mean that different revenue recognition criteria are
applied in different countries. In particular, the law may determine the point in time
at which the entity transfers the significant risks and rewards of ownership.
For example, in some jurisdictions in mail order sales, the seller must give the
customers a cooling-off period in which they have an unconditional right to cancel
the contract (eg on sale of goods by mail order the cooling-off period may end seven
working days after the day the goods are received). Therefore, the examples in this
module need to be read in the context of the laws relating to the sale of goods in the
country in which the transaction takes place.
23.10 An entity shall recognise revenue from the sale of goods when all the following conditions
are satisfied:
(a) the entity has transferred to the buyer the significant risks and rewards of ownership
of the goods. [Refer: paragraphs 23.1123.13]
(b) the entity retains neither continuing managerial involvement to the degree usually
associated with ownership nor effective control over the goods sold.
(c) the amount of revenue can be measured reliably.
(d) it is probable that the economic benefits associated with the transaction will flow to
the entity.
(e) the costs incurred or to be incurred in respect of the transaction can be measured
reliably.
[Refer: Appendix to Section 23, examples 1, 6 and 7]

Notes
Revenue is recognised only when it is probable that the economic benefits associated
with the transaction will flow to the entity (see paragraph 23.10(d)). In some cases, this
may not be probable until the consideration is received or until an uncertainty is
removed. For example, it may be uncertain that a foreign governmental authority will
grant permission to remit the consideration from a sale in a foreign country.
When an uncertainty arises about the collectibility of an amount already recognised as
revenue, the uncollectible amount or the amount in respect of which recovery has
IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

17

Module 23 Revenue
ceased to be probable is recognised as an expense, rather than as an adjustment of the
amount of revenue originally recognised.
Section 11 Basic Financial Instruments specifies requirements for the impairment of
financial instruments measured at cost or amortised cost.

Examples revenue from the sale of goods

Ex 22 An entity manufactures bespoke (ie customised) equipment for the plastic
manufacturing industry (the customers). The equipment is manufactured in parts.
The parts are assembled and installed at the customers factories. Legal title passes
when a customer accepts delivery and installation and inspection are complete.
Customers pay for the equipment upon accepting delivery.
The entity provides to its customers a standard two-year warranty against
manufacturing defects.
In this example, the customer inspected the equipment and accepted delivery.
The entity recognises revenue when the customer accepted the delivery (ie after
inspection) when the risks and rewards of ownership pass and the other factors listed in
paragraph 23.10 are satisfied.
Note: In accordance with Section 21 Provisions and Contingencies, the entity would
recognise a provision (liability) for its warranty obligation.
Ex 23 The facts are the same as in example 22.
In the year after the sale, the customer discovers a manufacturing defect in the
equipment acquired from the entity. In accordance with the warranty, the entity
fulfils its contractual obligation by replacing the defective part of the customers
equipment.
Revenue is not adjusted for the expenditures made in fulfilling the warranty obligation.
The warranty obligation is accounted for in accordance with Section 21 Provisions and
Contingencies.
Ex 24 The facts are the same as in example 22. However, in this example, the customer
was not satisfied with the equipment installed and accordingly did not accept
delivery.
The entity cannot recognise revenue because the risks and rewards of ownership have
not passed to the customer (ie the factors listed in paragraph 23.10 are not satisfied).
The equipment remains the inventory (asset) of the entity and would be assessed for
impairment in accordance with paragraphs 27.2 and 27.3.
Note: At this time there is no sale and therefore the entity would not recognise a
warranty provision (liability) unless it has an onerous contract.
Ex 25 The facts are the same as in example 22. However, in this example, the sale was on
normal credit terms, 60 days.
IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

18

Module 23 Revenue
When the customer accepted the delivery, the customer was in a sound financial
position. However, a month after delivery, the customers business was destroyed
by a natural disaster and the entity realistically expects to receive only 20 per cent
of the selling price on liquidation of the customer.
The entity recognised revenue (and a trade receivable) when the customer accepted the
delivery (ie after inspection) when the risks and rewards of ownership pass and the other
factors listed in paragraph 23.10 are satisfied.
The trade receivable is tested for impairment in accordance with Section 11 Basic
Financial Instruments (see paragraphs 11.2111.25). Revenue is unaffected by the
impairment.

23.11 The assessment of when an entity has transferred the significant risks and rewards of
ownership to the buyer requires an examination of the circumstances of the transaction.
In most cases, the transfer of the risks and rewards of ownership coincides with the
transfer of the legal title or the passing of possession to the buyer. This is the case for
most retail sales. In other cases, the transfer of risks and rewards of ownership occurs at
a time different from the transfer of legal title or the passing of possession.
[Refer: Appendix to Section 23, examples 58 and 10]

23.12 An entity does not recognise revenue if it retains significant risks of ownership. Examples
of situations in which the entity may retain the significant risks and rewards of ownership
are:
(a) when the entity retains an obligation for unsatisfactory performance not covered by
normal warranties.
(b) when the receipt of the revenue from a particular sale is contingent on the buyer
selling the goods.
[Refer: Appendix to Section 23, example 9]
(c) when the goods are shipped subject to installation and the installation is a significant
part of the contract that has not yet been completed.
[Refer: Appendix to Section 23, example 2]
(d) when the buyer has the right to rescind the purchase for a reason specified in the
sales contract, or at the buyers sole discretion without any reason, and the entity is
uncertain about the probability of return.
[Refer: Appendix to Section 23, example 3]

Example seller retains significant risks of ownership

Ex 26 An entity accepts an order from a customer for the manufacture of a product that
has never been manufactured (eg a spaceship that significantly surpasses current
technologies). The entity guarantees a specified level of performance from the
product (eg the spaceship is capable of landing on Mars and returning to earth).
It will only be known if the guaranteed level of performance will be achieved after
the product has operated as intended by the customer (ie after the spaceship
IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

19

Module 23 Revenue
returns from its first voyage to Mars). If the spaceship does not successfully
complete its maiden voyage the entity is required to refund the purchase price to
its customer.
Legal title passes on delivery.
Because of the uncertainties about whether the product can attain the guaranteed level
of performance the risks and rewards of ownership do not pass until the successful
completion of the maiden voyage (ie the entity retains substantial risks of ownership as
there is a significant possibility that the guaranteed level of performance will not be
achieved).
23.13 If an entity retains only an insignificant risk of ownership, the transaction is a sale and the
entity recognises the revenue. For example, a seller recognises revenue when it retains
the legal title to the goods solely to protect the collectibility of the amount due. Similarly
an entity recognises revenue when it offers a refund if the customer finds the goods faulty
or is not satisfied for other reasons, and the entity can estimate the returns reliably.
In such cases, the entity recognises a provision for returns in accordance with
Section 21 Provisions and Contingencies.

Examples seller does not retain significant risks of ownership

Ex 27 A manufacturer of vending machines sells ten vending machines to an amusement
park on credit. Payment is due within three months of delivery. For all sales on
credit the manufacturer writes into the contract a clause that legal title passes only
when consideration is received and not on delivery.
Retention of title may indicate that the risks and rewards of ownership have not passed
to the buyer, although passing of title is not a required condition for revenue
recognition. Provided that the other revenue recognition criteria in paragraph 23.10 are
met and there is no reason to believe that the amusement park will fail to pay, revenue
can be recognised provided the only rights that the manufacturer retains together with
the title are those allowing repossession of the vending machines in the event of
non-payment by the amusement park. In other words, substantially all the risks and
reward of ownership pass from the manufacturer to the amusement park on delivery of
the vending machines. The temporary retention of legal title in this circumstance is
insignificant.
Ex 28 A retailer offers its customers a lifetime right of return on sales of torches.
Customers may return their torches for any reason, at any time, on presentation of
a valid receipt and have their money refunded. Consistent historical data show
that approximately 1 per cent of sales are refunded. The retailer expects this
refund rate to continue in the future.
The retailer retains only an insignificant and measurable level of the risks and rewards
of ownership. Provided that the other recognition criteria in paragraph 23.10 are met,
revenue should be recognised on sale. The possibility of returns affects the
measurement of the amount of revenue to be recognised for the sale of each torch (ie in
this example revenue must be recorded at 99 per cent of the cash selling price).
IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

20

Module 23 Revenue
Notes: If, in a later reporting period, actual returns are found to be greater than or less
than 1 per cent (the original estimate), the revision of the estimate is accounted for
prospectively (ie a change in estimate in accordance with Section 10 Accounting Policies,
Estimates and Errors).

Rendering of services
Notes
The primary issue in accounting for revenue from rendering services is determining
when to recognise revenue. Paragraph 23.14 specifies conditions that must be satisfied
for revenue from the rendering of services to be recognised using the percentage of
completion method when the outcome of the transaction can be estimated reliably.
Paragraphs 23.15 and 23.2123.27 provide mandatory guidance for applying the
percentage of completion method. Paragraph 23.16 specifies how revenue from the
rendering of services is recognised when the outcome of the transaction cannot be
estimated reliably.

23.14 When the outcome of a transaction involving the rendering of services can be estimated
reliably, an entity shall recognise revenue associated with the transaction by reference to
the stage of completion of the transaction at the end of the reporting period (sometimes
referred to as the percentage of completion method). The outcome of a transaction can
be estimated reliably when all the following conditions are satisfied:
(a) the amount of revenue can be measured reliably.
(b) it is probable that the economic benefits associated with the transaction will flow to
the entity.
(c) the stage of completion of the transaction at the end of the reporting period can be
measured reliably.
(d) the costs incurred for the transaction and the costs to complete the transaction can be
measured reliably.
Paragraphs 23.2123.27 provide guidance for applying the percentage of completion
method.
[Refer: Appendix to Section 23, paragraph 23.A1 and examples 1420]

Notes
Revenue is recognised only when it is probable that the economic benefits associated
with the transaction will flow to the entity (see paragraph 23.14(b)). However, when an
uncertainty arises about the collectibility of an amount already included in revenue,
the uncollectible amount, or the amount in respect of which recovery has ceased to be
probable, is recognised as an expense, rather than as an adjustment of the amount of
revenue originally recognised.
An entity is generally able to make reliable estimates after it has agreed to the
IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

21

Module 23 Revenue
following:
(a)

each partys enforceable rights regarding the service to be provided and

received by the parties;

(b)

the consideration to be exchanged; and

(c)

the manner and terms of settlement.

It is also usually necessary for the entity to have an effective internal financial
budgeting and reporting system. The entity reviews and, when necessary, revises the
estimates of revenue as the service is performed. The need for such revisions does not
necessarily indicate that the outcome of the transaction cannot be estimated reliably.

Examples rendering of services

Ex 29 A calibration engineer entered into a contract to calibrate a manufacturers
machine at six-month intervals over a two-year period ending 31 December 20X2.
On 1 January 20X1 the manufacturer paid the calibration engineer CU10,000.
The cost to the calibration engineer of performing each calibration is approximately
CU1,000.
The calibration engineer must recognise CU2,500 revenue from the provision of the
calibration services when it performs the calibration services in each of June 20X1,
December 20X1, June 20X2 and December 20X2. The calibration services are performed
by a predetermined number of acts (four calibrations) at specified times (six-month
intervals from 1 January 20X1). Hence the amount received on 1 January 20X1
(CU10,000) is initially recognised by the calibration engineer as a liability.
Ex 30 An entity provides maintenance services to a third party under a contract for a
fixed price of CU100,000. The entity initially estimated that its total costs under
the contract will be CU60,000. At the end of the reporting period (20X1) the entity
has incurred CU50,000 costs and it expects to incur a further CU15,000 costs to
complete the maintenance services.
The entity determines the stage of completion of the contract by reference to the
proportion that costs incurred for work performed to date bear to the estimated
total costs (see paragraph 23.22(a)).
At the end of 20X1 the contract is 76.923 per cent completecalculation: CU50,000 costs
incurred CU65,000 estimated total contract costs. Accordingly, in 20X1 the entity
must recognise revenue of CU76,923calculation: 76.923% CU100,000 total expected
revenue. Furthermore, the entity must recognise costs of CU50,000.
23.15 When services are performed by an indeterminate number of acts over a specified period
of time, an entity recognises revenue on a straight-line basis over the specified period
unless there is evidence that some other method better represents the stage of
completion. When a specific act is much more significant than any other act, the entity
postpones recognition of revenue until the significant act is executed.

IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

22

Module 23 Revenue
Examples services performed by an indeterminate number of acts
Ex 31 A security firm enters into contracts to provide armed responses to homeowners
when their alarm systems are triggered. The security firm has a 30 June year-end.
On 1 January 20X1 one homeowner paid the security firm CU10,000. In return for
the fixed fee, the security firm is contractually obliged to provide its armed
response services to the homeowner for a two-year period.
The security firm must recognise revenue from the provision of the armed response
service on a straight-line basis over the two-year period (ie CU417 per month = CU10,000
revenue 24 months). Call-outs take place only when the alarm is triggered in the
two-year contract period. The frequency and timing of these events cannot be
determined.
Therefore, revenue will be recognised as follows:
Year ended June 20X1: CU10,000 6 24 months = CU2,500.
Year ended June 20X2: CU10,000 12 24 months = CU5,000
Year ended June 20X3: CU10,000 6 24 months = CU2,500.
Ex 32 The facts are the same as in example 29.
(A calibration engineer entered into a contract to calibrate a manufacturers
machine at six-month intervals over a two-year period ending 31 December 20X2.
On 1 January 20X1 the manufacturer paid the calibration engineer CU10,000.
The cost to the calibration engineer of performing each calibration is approximately
CU1,000.)
The calibration services are performed by a predetermined number of acts (four
calibrations) at specified times (six-month intervals from 1 January 20X1), ie the
requirements in paragraph 23.15 do not apply to this transaction.
Ex 33 A vehicle dealer enters into contracts to maintain its customers new vehicle for a
three-year period.
On 1 January 20X1 a customer paid the dealer CU10,000. Experience has shown that
the costs to the dealer of maintaining new vehicles of the model owned by the
customer are on average CU1,000 in the first year of ownership, CU1,000 in the
second year and CU3,000 in the third year.
The mechanic must recognise revenue from the provision of the vehicle maintenance
services to the customer as follows: CU2,000 in 20X1, CU2,000 in 20X2 and CU6,000 in
20X3. Although the vehicle maintenance services are performed by an indeterminate
number of acts over a specified period of time, experience provides evidence that
20 per cent of the work will be performed in each of years 1 and 2 and 60 per cent of the
work will be performed in year 3. This ratio better represents the stage of completion
and it reflects the expectation of a constant gross margin over the period of the
contract).

IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

23

Module 23 Revenue
Ex 34 Two research firms (A and B) are competing to develop a compound for a
pharmaceutical manufacturer. In accordance with the contractual arrangements,
A and B will simultaneously attempt to develop the compound. The manufacturer
will pay CU1,000,000 to the research firm that first delivers to it the completed
compound that meets predetermined specifications. The other research firm will
receive nothing.
When the pharmaceutical manufacturer accepted the compound developed by A, B
abandoned its development in progress.
The submission of the compound developed to the predetermined specifications in
advance of the competing research firm is a specific act that is more significant than any
other act. Accordingly, the research firms postpone recognition of revenue until the
pharmaceutical manufacturer accepts its compound.
When the pharmaceutical manufacturer accepts the compound A recognises
CU1,000,000 revenue.
B does not record any revenueno economic benefits will flow to B as a result of the
services it provided to the pharmaceutical manufacturer.
23.16 When the outcome of the transaction involving the rendering of services cannot be
estimated reliably, an entity shall recognise revenue only to the extent of the expenses
recognised that are recoverable.

Notes
Often, in the early stages of a transaction, the outcome cannot be estimated reliably.
Nevertheless, it may be probable that the entity will recover the transaction costs
incurred. Therefore, revenue is recognised only to the extent of costs incurred that are
expected to be recoverable. As the outcome of the transaction cannot be estimated
reliably, no profit is recognised.

Examples Outcome of a services transaction cannot be estimated reliably

Ex 35 A law firm is contracted to represent a group of past employees in a class action
lawsuit against a mining company. The law firm will receive a fee for legal services
provided equal to 20 per cent of the total damages awarded by the court (or any out
of court settlement). However, if the lawsuit fails the law firm will receive nothing.
When the outcome of the lawsuit cannot be estimated reliably, the law firm cannot
recognise any revenuethe expenses recognised may not be recoverable.
When the outcome of the lawsuit can be estimated reliably, the law firm must recognise
revenue based on the percentage of completion method.
Ex 36 The facts are the same as in example 35. However, in this example irrespective of
the outcome of the lawsuit the law firm will be remunerated on the basis of the
time spent in pleading the case (ie X hours spent CU100 per hour). In the current
reporting period the law firm spent 120 hours on the lawsuit.
IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

24

Module 23 Revenue
In this example the outcome of the transaction is not dependent upon the outcome of
the lawsuit (ie the client pays irrespective of the outcome of the lawsuit).
The law firm must recognise revenue based on the actual hours worked (ie 120 hours
CU100 per hour = CU12,000).
Ex 37 Two consultancy firms (A and B) are competing to assist a gaming firm in its bid for
a casino licence to be granted by Government X in a competitive bidding process.
In accordance with the contractual arrangements both A and B will prepare
independent bid proposals for the gaming firm to consider. The gaming firm will
select one of the proposals developed by A and B for submission as its bid in the
competitive bidding process.
The consultancy firm whose proposal is selected to be submitted by the gaming firm
to Government X, will receive a fee for its services based on a predetermined hourly
rate. The consultancy firm whose proposal is not submitted, will receive nothing.
Consultancy firms usually bill their clients an hourly rate that is payable
irrespective of whether their clients act on their advice.
The gaming firm selects As proposal and submits it to Government X as its bid for
the casino licence.
When the selection of either bid proposal by the gaming firm cannot be estimated
reliably, the consultancy firms cannot recognise any revenuethe expenses recognised
are not recoverable.
When the outcome of the selection can be estimated reliably, the consultancy firm
whose bid is reliably expected to be selected must recognise revenue based on the
percentage of completion method. The other consultancy firm would continue to
postpone recognition of revenue.
In this case it might be that the outcome of the transaction can be estimated with
sufficient reliability only when the gaming firm announces which bid proposal it has
selected (ie when the gaming firm selects As proposal).

Construction contracts

Notes
A construction contract is a contract specifically negotiated for the construction of an
asset or a combination of assets that are closely interrelated or interdependent in
terms of their design, technology and function or their ultimate purpose or use.
Normally construction contracts will be for a period longer than a year. However,
some contracts lasting less than a year may also fall within the definition.
This section specifies the accounting for construction contracts in the financial
statements of contractors. Furthermore, the requirements in this section cover both
the accounting treatment of revenue and costs associated with construction contracts.
Because of the nature of the activity undertaken in construction contracts the date at
IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

25

Module 23 Revenue
which the contract activity is entered into and the date when the activity is completed
usually fall into different accounting periods. Therefore, the primary issue in
accounting for construction contracts is the allocation of contract revenue and
contract costs to the accounting periods in which construction work is performed.
In particular, determining when the outcome of the contract can be estimated reliably
(see paragraph 23.17) and determining the stage of completion of the contract activity.
Paragraphs 23.1823.20 provide guidance on segmenting contracts into a number of
construction contracts and combining contracts into a single construction contract.
Paragraphs 23.2123.27 provide guidance for applying the percentage of completion
method in accounting for a construction contract in the financial statements of a
contractor. If the entire contract falls into a single accounting period then the entity
will not need to allocate revenue and costs to different accounting periods. Since the
contract commences and terminates in the same period, all revenue and costs will be
recognised in the same accounting period (see example 38).
The guidance provided for recognising revenue from the rendering of services (eg
paragraph 23.14 is also useful in accounting for construction contracts).

Illustration
A contract between a supplier and a customer for the production of a number of goods
over a period of time does not meet the definition of a construction contract.
For example, a long-term contract between a manufacturer and a wholesaler where the
manufacturer supplies the wholesaler with 10,000 kettles over the term of the contract
to the wholesalers predetermined specification would not be a construction contract.
It is simply a contract for the production of goods.
The contract could not be considered a construction contract for the construction of a
combination of assets since the kettles are not closely interrelated or interdependent
in terms of their design, technology and function or their ultimate purpose or use.
The manufacture and sale of a single kettle could not be considered an individual
construction contract since there is no significant specific negotiation for its
construction as the supplier sells 10,000 kettles to the wholesaler. In addition, the
entire production and delivery of an individual kettle will generally fall into a single
accounting period.

23.17 When the outcome of a construction contract can be estimated reliably, an entity shall
recognise contract revenue and contract costs associated with the construction contract
as revenue and expenses respectively by reference to the stage of completion of the
contract activity at the end of the reporting period (often referred to as the percentage of
completion method). Reliable estimation of the outcome requires reliable estimates of the
stage of completion, future costs and collectibility of billings. Paragraphs 23.2123.27
provide guidance for applying the percentage of completion method.
[Refer: paragraph 23.25 (outcome of the contract cannot be estimated reliably)]
[Refer: paragraph 23.26 (it is probable that total contract costs will exceed total contract
revenue)]
IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

26

Module 23 Revenue
Notes
Contract revenue
Contract revenue includes the initial amount of revenue agreed in the contract, as well
as variations in contract work, claims and incentive payments, to the extent that it is
probable that they will result in revenue and they are capable of being reliably
measured. It is probable that revenue will result from:

a variation when it is probable that the customer will approve the variation.

a claim when negotiations have reached such an advanced stage that it is

probable that the customer will accept the claim.

an incentive payment when the contract is sufficiently advanced for it to be

probable that the specified performance standards will be met or exceeded.

A variation is an instruction by the customer for a change in the scope of the work to
be performed under the contract. Examples of variations are changes in the
specifications or design of the asset and changes in the duration of the contract.
A claim is an amount that the contractor seeks to collect from the customer or another
party as reimbursement for costs not included in the contract price. A claim may arise
from, for example, delays caused by the customer, errors in specifications or design,
and disputed variations in contract work.
Incentive payments are additional amounts paid to the contractor if specified
performance standards are met or exceeded. For example, a contract may allow for an
incentive payment to the contractor for early completion of the contract. Incentive
payments are included in contract revenue when the contract is sufficiently advanced
for it to be probable that the specified performance standards will be met or exceeded
and the amount of the incentive payment can be measured reliably.
Contract costs
Contract costs include costs that relate directly to the specific contract, costs that are
attributable to contract activity in general and can be allocated to the contract and
such other costs as are specifically chargeable to the customer under the terms of the
contract.
Costs that relate directly to a specific contract include:
(a)

site labour costs, including site supervision;

(b)

costs of materials used in construction;

(c)

depreciation of plant and equipment used on the contract;

(d)

costs of moving plant, equipment and materials to and from the contract site;

(e)

costs of hiring plant and equipment;

(f)

costs of design and technical assistance that is directly related to the contract;

(g)

the estimated costs of rectification and guarantee work, including expected

warranty costs; and

(h)

claims from third parties.

Some costs may be attributable to contract activity in general (eg construction

IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

27

Module 23 Revenue
overheads) and can be allocated to specific contracts.
Costs that cannot be attributed to contract activity or cannot be allocated to a contract
are excluded from the costs of a construction contract. Such costs include:
(a)

general administration costs for which reimbursement is not specified in the

contract;

(b)

selling costs;

(c)

research and development costs for which reimbursement is not specified in

the contract; and

(d)

depreciation of idle plant and equipment that is not used on a particular

contract.

The estimates of contract costs and contract revenues often need to be revised as events
occur and uncertainties are resolved (see paragraph 23.21). The need for such revisions
does not necessarily indicate that the outcome of the contract cannot be estimated
reliably. Changes in accounting estimates are accounted for in accordance with
Section 10 Accounting Policies, Estimates and Errors.
[The examples below illustrate paragraph 23.17. This necessitates illustrating basic stage of
completion calculations within the examples. Paragraphs 23.2123.27 provide guidance for
applying the percentage of completion method and reference should be made to these
paragraphs and the related examples in this training material for an understanding of the
calculations involved.]

Examples construction contracts

Ex 38 Under a construction contract, a contractor agrees to a fixed contract price of
CU2,000 to refurbish the kitchen of a residential flat. The contractors initial
estimate of contract costs at 1 February 20X1, the date the contract is agreed, is
CU1,200.
The contractor has a 31 December year-end. The contract price will be paid to the
contractor on completion of the refurbishment.
The refurbishment was completed on 31 July 20X1 at a cost of CU1,250 (ie actual
costs incurred under the contract as at 31 July 20X1 are CU1,250).
Although this contract meets the definition of a construction contract, construction falls
into a single accounting period (assuming that the entity does not prepare interim
financial statements). Therefore there is no need to allocate contract revenue and
contract costs to different accounting periods as the stage of completion is nil per cent
at the start of the accounting period and 100 per cent at the end of the accounting
period.
Contract revenue of CU2,000 and contract costs of CU1,250 are recorded in 20X1.
Ex 39 The facts are the same as in example 38. However, in this example the contractor
has a 30 June year-end.
IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

28

Module 23 Revenue
As at 30 June 20X1 contract costs incurred for work performed to date are CU800
and the contractor estimates that costs to complete the contract will be CU400 (ie
total contract costs will be CU1,200).
The contractor determines the stage of completion of the contract by calculating
the proportion that contract costs incurred for work performed to date bear to the
latest estimated total contract costs (see paragraph 23.22).
Since construction falls into two accounting periods, stage of completion calculations
must be performed to allocate contract revenue between the two accounting periods.
The contractor calculates the stage of completion as follows:
Stage of completion = costs incurred relating to work performed to date estimated
total costs.
Stage of completion at 30 June 20X1 = 66.67% (ie CU800 CU1,200 = 66.67%).
For the year ended 30 June 20X1 the contractor must recognise revenue of CU1,333 (=
CU2,000 66.67%) and costs of CU800 for this contract.
For the year ended 30 June 20X2 the contractor must recognise revenue of CU667 (ie
CU2,000 less CU1,333 recognised in prior periods) and costs of CU450 (ie CU1,250 less
CU800 recognised in prior periods) for this contract.
Ex 40 Under a construction contract, a contractor agrees to receive a 40 per cent fixed
return on its direct contract costs from the customer. The contractors initial
estimate of contract costs at 1 January 20X1, the date the contract is agreed, is
CU2,000 (all of which are considered direct costs). Therefore, expected revenue
under the contract is CU2,800. The contract is expected to last two years.
The contractor has a 31 December year-end.
At 31 December 20X1 contract costs of CU1,045 have been incurred and the
contractor expects total contract costs to be CU1,900 (all considered direct costs).
At 31 December 20X2 actual costs are CU2,000. However, only CU1,800 meet the
criteria in the contract to be considered direct costs when determining the
40 per cent fixed return.
The contractor determines the stage of completion of the contract by calculating
the proportion that contract costs incurred for work performed to date bear to the
latest estimated total contract costs.
Stage of completion at 31 December 20X1 = 55% (ie CU1,045 CU1,900 = 55%).
In the year ended 31 December 20X1 the contractor should recognise revenue of CU1,463
(ie CU1,900 (100% + 40%) 55%) and costs of CU1,045 for this contract. A short cut to
measuring revenue in a cost plus contractadd the agreed margin to the specified costs,
(ie in this example, CU1,045 + 40% CU1,045 = CU1,463).
In the year ended 31 December 20X2 the contractor should recognise revenue of CU1,057
(ie CU1,800 (100% + 40%) less CU1,463) and costs of CU955 (ie CU2,000 less CU1,045) for
this contract. ShortcutCU1,800 + 40% CU1,800 less CU1,463 recognised in 20X1 =
CU1,057.

IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

29

Module 23 Revenue
Ex 41 A contractor enters into a construction contract on 1 January 20X1. The contractor
agrees to a fixed contract price of CU9,000 to build a bridge. The contractors
initial estimate of contract costs is CU8,000. The contractor expects that it will take
three years to build the bridge.
The contractor has a 31 December year-end.
By the end of the first year of the contract (31 December 20X1), the contractors
estimate of total contract costs has increased to CU8,050.
In 20X2 the customer and contractor agree to a variation resulting in an increase in
contract revenue of CU200 and estimated additional contract costs of CU150. At the
end of 20X2, costs incurred include CU100 paid for standard materials stored at the
site to be used in 20X3 to complete the project.
The contractor determines the stage of completion of the contract by calculating
the proportion that contract costs incurred for work performed to date bear to the
latest estimated total contract costs. A summary of the financial data in the
construction period is as follows:

20X3

20X2

20X1

CU

CU

CU

9,000

9,000

9,000

200

200

Total revenue

9,200

9,200

9,000

Costs incurred to date

8,200

6,168

2,093

2,032

5,957

8,200

8,200

8,050

20X3

20X2

20X1

CU

CU

CU

Costs incurred relating to work performed to date

8,200

(a)

6,068

2,093

Stage of completion

100%

74%

Initial amount of revenue agreed in contract

Variation

Estimated costs to complete

Total estimated costs

The contractor calculates the stage of completion as follows:

(b)

(a)

CU6,168 costs incurred less CU100 costs that relate to 20X3 = CU6,068.

(b)

CU6,068 contract costs CU8,200 estimated total contract costs = 74% complete.

(c)

CU2,093 contract costs CU8,050 estimated total contract costs = 26% complete.

IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

(c)

26%

30

Module 23 Revenue

Revenue and expenses are recognised in profit or loss as follows:

To date

Recognised in
prior years

Recognised in
current year

CU

CU

CU

Revenue (26% of CU9,000)

2,340

2,340

Expenses (26% of CU8,050)

2,093

2,093

247

247

Revenue (74% of CU9,200)

6,808

2,340

4,468

Expenses (74% of CU8,200)

6,068

2,093

3,975

740

247

493

Revenue (100% of CU9,200)

9,200

6,808

2,392

Expenses

8,200

6,068

2,132

Profit

1,000

740

260

20X1

Profit
20X2

Profit
20X3

23.18 The requirements of this section are usually applied separately to each construction
contract. However, in some circumstances, it is necessary to apply this section to the
separately identifiable components of a single contract [Refer: paragraph 23.19] or to a
group of contracts together [Refer: paragraph 23.20] in order to reflect the substance of a
contract or a group of contracts.

Notes
The requirements in paragraphs 23.1823.20 regarding combining and segmenting
contracts aim to reflect the substance of the arrangement, rather than its legal or
contractual form. When the criteria in paragraph 23.19 are met, the segregation of a
single contract is required (this is not optional). Similarly the combination of a group
of contracts is required when the criteria in 23.20 are met.
Sometimes it is necessary to break a single contract into its separately identifiable
components and apply the requirements in this section to each of those components
separately. Conversely, there may be situations where a group of separate contracts
should be treated as one contract, because in substance they represent a single
contract. To assess whether to combine or segregate contracts, an entity should assess
whether a contract (or a component of a contract) was negotiated independently of
other related contracts (or components), or whether all the contracts (or components)
were negotiated together as a package. To make this assessment, the criteria in
paragraphs 23.19 and 23.20 must be applied.
It is important to combine or segregate contracts appropriately since combining or
segmenting will have a significant effect on the allocation of revenue and profit
between accounting periods.
IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

31

Module 23 Revenue
23.19 When a contract covers a number of assets, the construction of each asset shall be
treated as a separate construction contract when:
(a) separate proposals have been submitted for each asset;
(b) each asset has been subject to separate negotiation, and the contractor and
customer are able to accept or reject that part of the contract relating to each asset;
and
(c) the costs and revenues of each asset can be identified.

Example construction contracts covering a number of assets

Ex 42 An entity was awarded a CU5,000,000 (fixed price) contract by a transport authority
to construct a 1,000 kilometre road and to build a sports stadium. The entity
submitted separate tenders for the construction of the road and the stadium.
The tenders were considered in separate competitive bidding processes.
The construction of each asset must be treated as a separate construction contract since
the criteria in paragraph 23.19 are met:

23.20

(a)

separate proposals were submitted for the road and the stadium;

(b)

the road and the stadium were subject to separate negotiation and the entity and
the transport authority were able to accept one tender and reject the other one
evidenced by separate tenders awarded independently of each other; and

(c)

in order to prepare its separate tenders, the entity must have been able to
segregate the costs and therefore the costs and revenues of each asset can be
identified. The CU5,000,000 fixed price contract is the sum of those prices.

A group of contracts, whether with a single customer or with several customers, shall be
treated as a single construction contract when:
(a) the group of contracts is negotiated as a single package;
(b) the contracts are so closely interrelated that they are, in effect, part of a single project
with an overall profit margin; and
(c) the contracts are performed concurrently or in a continuous sequence.

Examples group of construction contracts

Ex 43 An entity is contracted to design and construct a railroad that will wind through
five timber farmers plantations and link to the nearby national railroad system
(the project). The design specification is to optimise the efficiency of transporting
the timber from the farmers lands to the national railroad system. The length of
the track on each farmers land may vary and is not necessarily proportional to the
size of the farmers plantations.
In securing the project the entity negotiated with the farmers collectively.
However, once the farmers agreed to contract with the entity to undertake the
project, separate contracts were entered into with each of the farmers. Each farmer
is contractually bound to pay the entity CU100,000 for the design and construction
of the portion of the railroad to be built on its land.
IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

32

Module 23 Revenue
The entity must treat the group of contracts with the five farmers as a single
construction contract:
(a)

the group of five contracts was negotiated as a single package for the design and
construction of a railroad that efficiently winds through the five farmers
plantations;

(b)

the contracts are so closely interrelated that they are, in effect, part of a single
project with an overall profit marginthe railroad is designed and constructed
for overall efficiency across the five farmers plantations. The costs to be
incurred on each farmers land has no bearing on the CU100,000 (fixed amount)
that each farmer is required to pay the entity; and

(c)

the contracts are performed concurrently or in a continuous sequencethe

construction of a railroad that winds across five farmers lands would necessarily
be designed concurrently and it would be constructed concurrently or in a
continuous sequence.

Ex 44 An entity was awarded a CU5,000,000 fixed price contract by a transport authority

to construct a 1,000 kilometre road including the construction of a bridge on that
stretch of road. As required by the transport authority, the entity submitted a
single tender for the construction of the road and the bridge. The transport
authority considered the tenders received in a single competitive bidding process
and awarded the entity the project for the construction of the road and the bridge.
The construction of the road and the bridge cannot be treated as separate construction
contracts since the criteria in paragraph 23.19 are not met. Separate proposals were not
submitted for construction of the road and the bridge. Furthermore, tenders for the
construction of the road and the bridge were considered as a single project.
The construction of the road and the bridge were neither subject to separate negotiation
nor was the entity or the transport authority able to accept or reject the tender for one
part (the road or the bridge) without the other.
Furthermore, the construction of the road and the bridge must be treated as a single
contract because the criteria in paragraph 23.20 for combining individual contracts are
met:
(a)

the two components (ie construction of the road and construction of the bridge)
are negotiated as a single package;

(b)

the components are very closely interrelated since they are negotiated together,
the bridge is built on the stretch of road, and one component will not be awarded
to the contractor without the other; and

(c)

it is expected that the contracts will be performed concurrently or in a

continuous sequence as the bridge cannot be utilised to its full extent without
the road and vice versa. Also since the bridge is part of the road, the road cannot
be completed unless the bridge is completed.

Therefore, even if these two assets had been contractually separate agreements, they
would still need to be combined.

IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

33

Module 23 Revenue
Percentage of completion method
23.21 This method is used to recognise revenue from rendering services (see paragraphs
23.1423.16) and from construction contracts (see paragraphs 23.1723.20). An entity
shall review and, when necessary, revise the estimates of revenue and costs as the
service transaction or construction contract progresses.

Notes
The measurement of revenue and costs is affected by a variety of uncertainties that
depend on the outcome of future events. In particular, under a construction contract,
the estimates of contract revenue and contract costs often need to be revised as events
occur and uncertainties are resolved. For example, the amount of contract revenue
may increase or decrease from one period to the next if a contractor and a customer
agree variations or claims, or as a result of penalties arising from delays caused by the
contractor in the completion of the contract. Similarly, projected costs may increase
or decrease as circumstances change. The need for such revisions does not necessarily
indicate that the outcome of the contract cannot be estimated reliably.
At the end of each reporting period, an entity must review its estimates of contract
revenue and contract costs and revise them if they have changed. The percentage of
completion method is applied on a cumulative basis and so revisions are treated as
changes in estimates meaning that prior periods are not adjusted (see
Section 10 Accounting Policies, Estimates and Errors).
The revised estimates are used when determining the percentage of completion and
the amount of revenue and expenses to recognise in profit or loss in the period in
which the change is made and in future periods. For example, in a four-year project, if
contract revenue and contract costs are revised in year 2 of the project, no adjustment
is made to the revenue or expenses recognised in year 1. The change will be reflected
in years 2, 3 and 4.

23.22 An entity shall determine the stage of completion of a transaction or contract using the
method that measures most reliably the work performed. Possible methods include:
(a) the proportion that costs incurred for work performed to date bear to the estimated
total costs. Costs incurred for work performed to date do not include costs relating to
future activity, such as for materials or prepayments.
(b) surveys of work performed.
(c) completion of a physical proportion of the service transaction or contract work.
Progress payments and advances received from customers often do not reflect the work
performed.

IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

34

Module 23 Revenue

Notes
The above examples consider the impact on profit or loss of construction contracts.
This note considers the impact on the statement of financial position (balance sheet).
For each construction contract in progress at the reporting date the gross amount due
from customers is shown as an asset in the statement of financial position at the net
amount of:
(a)

total costs incurred on the contract plus the cumulative recognised profit (or
less the cumulative recognised loss); less

(b)

progress billings (ie amounts actually invoiced to customers for work

performed on a contract whether or not they have been paid by the customer).

The gross amount due from customers is disclosed separately from inventories to
which Section 13 applies.
Where progress billings exceed total costs incurred plus cumulative recognised profit
(or less cumulative recognised loss), the balance will be a net credit balance and hence
this is shown as a liability in the statement of financial position known as the gross
amount due to customers. This negative balance must not be offset against positive
balances on other contracts.
The section does not specify the classification of either the asset or the liability for
amounts due from/to customers.
Any progress billings which have not been paid by the customer at the reporting date
are included in trade receivables (separate from amount due from/to customers).

Examples stage of completion

Ex 45 A construction contractor has a fixed price contract for CU100,000 to construct a
building (the project).
The contractors estimate of total contract costs is CU60,000. It will take two years
to construct the building.
At the end of the first year of the project (31 December 20X1):

the contractor has incurred costs of CU20,000 on the contract, including

CU2,000 on cement that is held offsite

an independent surveyor certified that 28 per cent of the contract work is

completed

the site was cleared (stipulated in the contract to constitute 10 per cent of the
total project), the foundations laid (stipulated as 5 per cent of the total
project) and the walls of the building erected (stipulated as 14 per cent of the
total project).

IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

35

Module 23 Revenue
The contractor determines that the stage of completion of the construction contract
is measured most reliably by reference to the proportion that costs incurred for
work performed to date bear to the estimated total costs. (2)
At 31 December 20X1 the stage of completion of the contract is 30 per centcalculation:
(CU20,000 costs incurred less CU2,000 costs relating to future activity) CU60,000
estimated total contract costs = 30 per cent.
Ex 46 The facts are the same as in example 45. However, in this example the contractor
determines that the stage of completion of the construction contract is measured
most reliably by reference to independent surveys of work performed.
At 31 December 20X1 the stage of completion of the contract is 28 per centdetermined
by the independent surveyor.
Ex 47 The facts are the same as in example 45 above. However, in this example the
contractor determines that the stage of completion of the construction contract is
measured most reliably by reference to completion of a physical proportion of the
contract work.
At 31 December 20X1 the stage of completion of the contract is 29 per centcalculation:
10 per cent (clearing the site) + 5 per cent (laying the foundations) + 14 per cent (building
the walls).
23.23 An entity shall recognise costs that relate to future activity on the transaction or contract,
such as for materials or prepayments, as an asset if it is probable that the costs will be
recovered.

Notes
When a contractor determines the stage of completion of the contract by calculating
the proportion that contract costs incurred for work performed to date bear to the
latest estimated total contract costs, this results in all contract costs being charged to
expense in the period incurred, unless such costs relate to future activity on the
contract (eg raw materials purchased for future use or payments made to
subcontractors in advance of work to be performed under the subcontract). Such costs
that relate to future activity may be carried forward as a separate asset (eg raw
materials) in the statement of financial position provided that it is probable that they
will be recovered under the contract.
Examples of circumstances in which the recoverability of contract costs incurred may
not be probable and in which contract costs may need to be recognised as an expense
immediately include contracts:

(2)

(a)

that are not fully enforceable (ie their validity is seriously in question);

(b)

the completion of which is subject to the outcome of pending litigation or

legislation;

Examples 46 and 47 illustrate other methods of determining the stage of completion. The entity is required to use the

method that measures most reliably the work performed (see paragraph 23.22).

IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

36

Module 23 Revenue
(c)

relating to properties that are likely to be condemned or expropriated;

(d)

where the customer is unable to meet its obligations; or

(e)

where the contractor is unable to complete the contract or otherwise meet its
obligations under the contract.

Examples recognition of costs on a construction contract

Ex 48 A construction contractor has a fixed price contract for CU100,000 to construct a
building (the project).
The contractors initial estimate of total contract costs is CU60,000. It will take two
years to construct the building.
At the end of the first year of the project (31 December 20X1) the contractor has
incurred costs of CU20,000 on the contract, including CU2,000 on cement that is
held offsite. The entitys estimate of total contract costs has stayed the same.
The contractor determines the stage of completion of the construction contract by
reference to the proportion that costs incurred for work performed to date bear to
the estimated total costs.
At 31 December 20X1 the contract is 30 per cent completecalculation: (CU20,000 costs
incurred less CU2,000 costs relating to future activity) CU60,000 estimated total
contract costs = 30 per cent.
In 20X1 the contractor must recognise revenue and expenses of respectively CU30,000
(ie 30% CU100,000 total expected contract revenue) and CU18,000 (ie CU20,000 less
CU2,000). This means profit in 20X1 is CU12,000 (ie CU30,000 contract revenue less
CU18,000 contract expenses).
The CU2,000 of cement that is held offsite would be included in the statement of
financial position as an asset (inventories) and assuming no progress billings have been
made, an amount of CU30,000 would be included in the gross amount due from
customers for contract work for this contract, determined as follows:
(a) total costs incurred plus cumulative recognised profits (ie CU18,000 (ie excluding
cement inventory) + CU12,000); less
(b) progress billings (nil).
Ex 49 The facts are the same as in example 48. However, in this example the contractor
determines the stage of completion of the construction contract by reference to
independent surveys of work performed. At the end of 20X1 the project was
certified to be 28 per cent complete.
In 20X1 the contractor must recognise revenue of CU28,000 (ie 28% CU100,000 total
expected contract revenue). One way of accounting for contract costs is to recognise
them as an expense in profit or loss in the accounting periods in which the work to
which they relate is performed.(3) Using this method, in 20X1 the contractor would
(3)

The method used in this example (and in all other examples in this module in which the stage of completion is

determined other than by reference to the proportion that costs incurred for work performed to date bear to the estimated

IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

37

Module 23 Revenue
recognise contract expenses of CU18,000 in profit or loss (ie CU20,000 less CU2,000
cement inventory). This means profit in 20X1 is CU10,000 (ie CU28,000 contract revenue
less CU18,000 contract expenses).
Assuming no progress billings have been made, an amount of CU28,000 will be included
in the gross amount due from customers for contract work for this contract,
determined as follows:
(a)

total costs incurred plus cumulative recognised profit (ie CU18,000 + CU10,000);
less

(b)

progress billings (nil)

Ex 50 The facts are the same as in example 48. However, in this example the contractor
determines the stage of completion of the construction contract by reference to
independent surveys of work performed. At the end of 20X1 the project was
certified to be 32 per cent complete. Also in this example progress billings of
CU30,000 have been made as at the end of 20X1 and the customer has paid
CU20,000 of these progress billings.
In 20X1 the contractor must recognise revenue and expenses of respectively CU32,000
(ie 32% of CU100,000 total expected contract revenue) and CU18,000 (ie CU20,000 less
CU2,000 cement inventory). This means profit in 20X1 is CU14,000 (ie CU32,000 less
CU18,000).
In the entitys statement of financial position an amount of CU2,000 (the cement that is
held offsite) is included in inventories and the gross amount due from customers for
contract work of CU2,000 for this contract is determined as follows:
(a)

total costs incurred plus cumulative recognised profit (ie CU18,000 + CU14,000);
less

(b)

progress billings (CU30,000).

CU10,000 will be shown in trade receivables (a separate asset) for the progress billings
not yet settled by the customer (ie CU30,000 progress billings less CU20,000 received
from the customer).
23.24 An entity shall recognise as an expense immediately any costs whose recovery is not
probable.

23.25 When the outcome of a construction contract cannot be estimated reliably:

(a) an entity shall recognise revenue only to the extent of contract costs incurred that it is
probable will be recoverable, and
(b) the entity shall recognise contract costs as an expense in the period in which they are
incurred.

total costs) is consistent with the requirements of paragraph 26 of IAS 11 Construction Contracts of full IFRSs as issued at 9 July
2009.

IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

38

Module 23 Revenue
Example outcome cannot be estimated reliably
Ex 51 A construction contractor has a fixed price contract for CU100,000 to construct a
building of a design that has never before been constructed and using materials
that have never before been used in the construction of a building (the project).
The contractor began construction of the building in 20X1 and expects that
construction will take at least five years. In 20X1 the contractor incurred CU5,000
contract costs on the project.
At the end of 20X1 the contractor cannot estimate the outcome of the contract with
sufficient reliability to estimate the projects percentage of completion (ie because
of the uncertainties arising from the new design and new materials the entity
cannot estimate total expected contract costs with sufficient reliability). It is highly
likely that the contract price will be received from the customer.
At the end of 20X1 the contractor must recognise revenue only to the extent of
recoverable contract costs incurred (ie CU5,000 contract revenue and CU5,000 expenses).
23.26 When it is probable that total contract costs will exceed total contract revenue on a
construction contract, the expected loss shall be recognised as an expense immediately,
with a corresponding provision for an onerous contract (see Section 21).

Example expected loss on a construction contract

Ex 52 A construction contractor has a fixed price contract for CU100,000 to construct a
building (the project).
The contractors initial estimate of total contract costs was CU60,000.
At the end of the first year of the project (20X1) the contractor has incurred
CU90,000 contract costs and it expects to incur a further CU30,000 to complete the
project.
The contractor determines the stage of completion of the construction contract by
reference to the proportion that costs incurred for work performed to date bear to
the estimated total costs.
At the end of 20X1 the contract is 75 per cent completecalculation: CU90,000 costs
incurred CU120,000 estimated total contract costs. Accordingly, in 20X1 the
contractor must recognise revenue of CU75,000 (ie 75 per cent of CU100,000 total
expected contract revenue). Furthermore, the contractor must recognise contract costs
of CU90,000 and a further expense, provision for the additional expected loss on
completing the contract of CU5,000 (ie the amount by which estimated costs to
complete the contract (CU30,000) exceed expected future contract revenue (CU25,000)).
In other words, the total expected loss (CU20,000) on the onerous contract must be
accounted for in 20X1 (when the contract became onerous).
Note: Assuming no progress billings have been made, an amount of CU70,000 will be
included in the gross amount due from customers (an asset in the contractors
statement of financial position) for this contract, determined as follows:
IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

39

Module 23 Revenue
(a)

total costs incurred less cumulative recognised loss (ie CU90,000 less CU20,000);
less

(b)

progress billings (nil).

23.27 If the collectibility of an amount already recognised as contract revenue is no longer

probable, the entity shall recognise the uncollectible amount as an expense rather than as
an adjustment of the amount of contract revenue.

Example collectibility of recognised amounts

Ex 53 In 20X1 a contractor completed the construction of a building for a customer.
The contractor recognised the CU100,000 fixed price contract in revenue in the two
year construction period using the percentage of completion method.
In 20X2 when the customer owed the contractor CU100,000 for constructing the
building, a tsunami destroyed the customers business. At the end of 20X2 the
liquidator of the customer had informed the customers creditors that they would
receive a liquidation dividend of 10 per cent of the amount owed to them by the
customer in full and final settlement of the debt.
The contractor recognised CU100,000 in revenue in the two-year construction period
using the percentage of completion method. In 20X2 when the collectibility of the
amount was no longer probable, the contractor must recognise an expense of CU90,000
(ie 90% of CU100,000 debt). The expense must not be presented as a reversal of contract
revenue. See paragraphs 11.21 and 11.22 for further details about impairment of trade
receivables.

Examples accounting for construction contracts from start to finish

The examples below illustrate the accounting for a construction contract from its
inception to its completion.
Ex 54 On 1 January 20X1 a contractor enters into a construction contract which includes
a fixed contract price of CU12,000 to build a bridge.
The contractors initial estimate of contract costs is CU8,000 over a three-year
construction period.
The contractor has a 31 December year-end.
At 31 December 20X1 the contractors estimate of total contract costs is still
CU8,000. However, by the end of 20X2 the contractors estimate of contract costs
increased to CU10,000, excluding the variation below.
In 20X2 the customer and the contractor agree to a variation resulting in an
increase in contract revenue of CU200 and estimated additional contract costs of
CU150.
Actual cumulative costs incurred to the end of 20X1, 20X2 and 20X3 (the end of the
contract) including the costs of the variation are CU3,000, CU7,105 and CU10,050
respectively.
IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

40

Module 23 Revenue
At the end of 20X1, 20X2 and 20X3 the customer paid the contractor progress
billings of CU5,000, CU3,000 and CU4,200 respectively.
The contractor determines the stage of completion of the contract by calculating
the proportion that contract costs incurred for work performed to date bear to the
latest estimated total contract costs.
A summary of the financial data in the construction period is as follows:
20X3

20X2

20X1

CU

CU

CU

12,000

12,000

12,000

200

200

Total revenue

12,200

12,200

12,000

Costs incurred to date

10,050

7,105

3,000

3,045

5,000

Total estimated costs

10,050

10,150

8,000

Total estimated profit

2,150

2,050

4,000

20X3

20X2

20X1

CU

CU

CU

10,050

7,105

3,000

100%

70%

Initial amount of revenue agreed in contract

Variation

Estimated costs to complete

The contractor calculates the stage of completion as follows:

Costs incurred relating to work performed to date

Stage of completion

(a)

37,5%

(b)

Revenue, expenses and profit are recognised in the determination of profit or loss as follows:
20X3
CU
Revenue
Expenses
Profit (loss)
(a)

CU7,105 CU10,150 = 0.7

(b)

CU3,000 CU8,000 = 0.375

(c)

CU12,200 less (CU4,500 + CU4,040) = CU3,660

(d)

70% CU12,200 less CU4,500 = CU4,040

(e)

37.5% CU12,000 = CU4,500

(f)

CU10,050 less CU7,105 = CU2,945

(g)

CU7,105 less CU3,000 = CU4,105

3,660

20X1

20X2
CU
(c)

4,040

CU
(d)

4,500

(2,945) (f)

(4,105) (g)

(3,000)

715

(65)

1,500

IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

(e)

41

Module 23 Revenue

The asset or (liability) to be presented in the contractors statement of financial position at the end of each
year is:

Total costs incurred to date

Cumulative profits to date
Total progress billings to date

20X3

20X2

20X1

CU

CU

CU

10,050

7,105

3,000

2,150

1,435

1,500

(8,000)

(5,000)

(12,200)

Gross amount due from (to) the customer

for contract work

540

(500)

Ex 55 The facts are the same as in example 54. However, in this example the contractor
determines the stage of completion of the construction contract by reference to
independent surveys of work performed.
At the end of 20X1 the project was certified to be 40 per cent complete and at the
end of 20X2 the project was certified to be 65 per cent complete.

Stage of completion (as certified)

20X3

20X2

20X1

CU

CU

CU

100%

65%

40%

Revenue, expenses and profit are recognised in profit or loss as follows:

Revenue
Expenses
Profit (loss)
(a)

CU12,200 less (CU4,800 + CU3,130) = CU4,270

(b)

65% CU12,200 less CU4,800 = CU3,130

(c)

40% CU12,000 = CU4,800

(d)

CU10,050 less (CU7,105) = CU2,945

(e)

CU7,105 less CU3,000 = CU4,105

20X3

20X2

20X1

CU

CU

CU

4,270

(a)

(2,945) (d)
1,325

3,130

(b)

(c)

4,800

(4,105) (e)

(3,000)

(975)

1,800

The asset or (liability) to be presented in the contractors statement of financial position at the end of each
year is:

Total costs incurred to date

Cumulative profits to date
Total progress billings to date
Gross amount due from (to) the
customer for contract work

20X3

20X2

20X1

CU

CU

CU

10,050

7,105

3,000

2,150

825

1,800

(12,200)
0

IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

(8,000)
(70)

(5,000)
(200)

42

Module 23 Revenue
Interest, royalties and dividends
23.28 An entity shall recognise revenue arising from the use by others of entity assets yielding
interest, royalties and dividends on the bases set out in paragraph 23.29 when:
(a) it is probable that the economic benefits associated with the transaction will flow to
the entity, and
(b) the amount of the revenue can be measured reliably.

23.29 An entity shall recognise revenue on the following bases:

(a) interest shall be recognised using the effective interest method as described in
paragraphs 11.1511.20.
(b) royalties shall be recognised on an accrual basis in accordance with the substance of
the relevant agreement. [Refer: Appendix to Section 23, example 26]
(c) dividends shall be recognised when the shareholders right to receive payment is

established.

Examples interest, royalties and dividends

Ex 56 See examples 12 and 13 for examples relating to goods sold on credit.
In such transactions, revenue is allocated between revenue from the sale of goods and
interest revenue for the financing element.
Ex 57 An entity [Investor] invests CU100,000 in a debenture issued by a major local
corporation [Issuer]. The debenture contract requires Issuer, on the sixth
anniversary of the loan, to pay Investor CU134,010 to redeem the debenture
(ie CU100,000 repayment of capital and CU34,010 premium). The debenture has a
coupon of zero (ie it is interest-free).
In substance, the redemption premium is the interest return to the investor for six years,
paid entirely at maturity. The amortisation of the redemption premium is income.
Investor must recognise interest income of CU5,000 in year 1, CU5,250 in year 2, CU5,513
in year 3, CU5,788 in year 4, CU6,078 in year 5 and CU6,381 in year 6.
Amortised cost (see Section 11 Basic Financial Instruments) requires accrual of the CU34,010
premium to be recognised over the life of the debenture using the effective interest
method.
Using a spreadsheet or financial calculator, the effective interest rate on this debenture
is 5.00 per cent per year (ie the present value of a single payment of CU134,010 at the
end of six years at 5 per cent is CU100,000). The premium of CU34,010 would be
amortised as follows:

IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

43

Module 23 Revenue
Amortisation of premium
(5% x Asset)

Asset
100,000

Year 1

5,000

105,000

Year 2

5,250

110,250

Year 3

5,513

115,763

Year 4

5,788

121,551

Year 5

6,078

127,629

Year 6

6,381

134,010

Total

34,010

Ex 58 Entity A owns 2 per cent of the ordinary share capital of entity B.

On 18 December 20X4 the management of entity B proposed a dividend of
CU1,000,000 for the year ended 31 December 20X4. Entity A is not entitled to
receive the dividend of CU20,000 until the shareholders approve it on 28 February
20X5.
On 28 February 20X5 the dividend was ratified by the shareholders of entity B at the
annual general meeting. The dividend will be paid on 20 May 20X5 to shareholders
registered as owners of entity Bs ordinary shares on 28 February 20X5.
Both entity A and entity B have December year ends.
In the year ended 31 December 20X4 entity A should not recognise dividend revenue for
the dividend proposed on 18 December 20X4. Entity A is not entitled to receive the
dividend of CU20,000 until the shareholders approve it on 28 February 20X5.
Ex 59 The facts are the same as in example 58 above except entity A has a March year-end.
In the year ended 31 March 20X5 entity A should recognise dividend revenue of
CU20,000 for the dividend proposed on 18 December 20X4. Entity A is entitled to receive
the final dividend when the shareholders approve it on 28 February 20X5. In its
statement of financial position as at 31 March 20X5 entity A should recognise a
receivable for the dividend which will be paid on 20 May 20X5.
Ex 60 An IT company produces tax software. Customers purchase a one-year licence
which allows the software to be used for one tax year and then renewed if desired.
If renewed, the customer will receive updated software that is revised for any
changes in tax legislation for the next tax year. The IT company does not have any
further obligations after sale of the licence. Without upgrades, the software is
useful for only one tax year because of annual changes in tax legislation.
Since the IT company does not have any further obligations after sale, the annual licence
fee may be recognised in revenue immediately on sale of the licence (even if this date is
earlier than the start of the licence period) provided the conditions in paragraph 23.10
for recognising revenue from the sale of goods are satisfied.
Note: if customers are able to renew the licence at below market price for a further
period or periods (ie at a price lower than that paid in year one), then a portion of the
IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

44

Module 23 Revenue
year 1 revenue may need to be deferred over the expected period of renewal at below
market rates (see paragraph 23.9).
Ex 61 An IT company produces tax software. Customers purchase a licence which allows
the software to be used for 10 years from the date of purchase. Under the licence a
customer is entitled to receive all software upgrades free of charge over the licence
period. The software is updated annually for any changes in tax legislation and
also at other times whenever the IT company releases an improved version of the
software. The IT company also provides free support to any customers having
difficulty using the software.
Since the IT company has an ongoing obligation after sale to perform upgrades and
provide support, some or all of the revenue should be spread over the 10-year licence
period in order to recognise it in the period in which the upgrades and customer
support services are provided to the licensees.
The extent to which revenue is deferred will depend on the terms of the licence (eg how
significant the upgrades and support are compared to the software provided on day 1 of
the licence arrangement).
Note: the arrangement is a multiple element salea sale of goods (software) and services
(upgrade services and customer support services). Paragraph 23.8 has guidance on
determining the separately identifiable components of a single transaction.

Disclosures

General disclosures about revenue

23.30

An entity shall disclose:

(a) the accounting policies adopted for the recognition of revenue, including the
methods adopted to determine the stage of completion of transactions involving the
rendering of services.
(b) the amount of each category of revenue recognised during the period, showing
separately, at a minimum, revenue arising from:
(i)

the sale of goods.

(ii)

the rendering of services.

(iii) interest.
(iv) royalties.
(v) dividends.
(vi) commissions.
(vii) government grants.
(viii) any other significant types of revenue.

IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

45

Module 23 Revenue
Notes
If an entity has different policies for different types of revenue transactions, the policy
for each material type of transaction should be disclosed.

Example general disclosures

Ex 62 An entity could make general disclosures about revenue as follows:
Note 1 Accounting policies

Revenue recognition
Revenue is measured at the fair value of the consideration received or receivable, net of
discounts and sales-related taxes.
Revenue from sales of furniture is recognised when the goods are delivered to the
customer and any related installation has been complete.
Revenue from building design contracts is recognised under the percentage of
completion method. The stage of completion is measured by the labour hours incurred
to date as a percentage of the total estimated labour hours for each contract.
Revenue from construction contracts is recognised under the percentage of completion
method. The stage of completion is measured by the contract costs incurred to date as
a percentage of the total estimated contract costs for each contract.
If the outcome of a construction contract cannot be estimated reliably, contract
revenue is recognised to the extent of contract costs incurred that it is probable will be
recoverable.
When it is probable that total contract costs will exceed total contract revenue, the
expected loss is recognised as an expense immediately.
Note 5 Revenue

Revenue recognised during the year:

20X2

20X1

CU

CU

Sale of furniture

700,000

500,000

Rendering of building design services

100,000

80,000

3,000,000

2,900,000

3,800,000

3,480,000

Construction contracts

Revenue from construction contracts includes CU300,000 (20X1:CU0) recognised in

exchange for 1,000 hours of legal services.

IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

46

Module 23 Revenue
Disclosures relating to revenue from construction contracts
23.31

An entity shall disclose the following:

(a) the amount of contract revenue recognised as revenue in the period.
(b) the methods used to determine the contract revenue recognised in the period.
(c) the methods used to determine the stage of completion of contracts in progress.

23.32 An entity shall present:

(a) the gross amount due from customers for contract work, as an asset.
(b) the gross amount due to customers for contract work, as a liability.

Example disclosures about construction contracts

Ex 63 A contractor has reached the end of its first year of operations. All its contract
costs incurred have been paid for in cash and all its progress billings and advances
have been received in cash. Contract costs incurred for contracts B, C and E include
the cost of materials that have been purchased for the contract but which have not
been used in contract performance to date. For contracts B, C and E, the customers
have made advances to the contractor for work not yet performed.
The status of its five contracts in progress at the end of the reporting period is as
follows:
A

Total

CU

CU

CU

CU

CU

CU

Contract revenue recognised in

accordance with paragraph 23.17

145

520

380

200

55

1,300

Contract expenses recognised in

accordance with paragraph 23.17

(110)

(450)

(350)

(250)

(55)

(1,215)

Expected losses recognised in

accordance with paragraph 23.26

(40)

(30)

(70)

Recognised profits less recognised

losses

35

70

30

(90)

(30)

15

Contract costs incurred in the period

110

510

450

250

100

1,420

(110)

(450)

(350)

(250)

(55)

(1,215)

Contract costs incurred recognised as

contract expenses in the period in
accordance with paragraph 23.17
Contract costs that relate to future
activity recognised as an asset in
accordance with paragraph 23.23

60

100

45

205

Contract revenue (see above)

145

520

380

200

55

1,300

Progress billings

100

520

380

180

55

1,235

45

20

65

80

20

25

125

Unbilled contract revenue

Advances

IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

47

Module 23 Revenue
Extract from SME group consolidated statement of financial position at 31 December 20X1:
Notes

20X1

20X0

CU

CU

45

Assets
Gross amount due from customers for contract work

Prepaid expenses

205

Liabilities
Advances from customers
Gross amount due to customers for contract work

125

50

Extract from the notes to the financial statements for the year ended 31 December 20X1

Note 1 Accounting policies

Revenue arising from construction contracts

Revenue from construction contracts is recognised on the percentage of completion
method, measured by reference to the percentage of contract costs incurred to date to
estimated contract cost for each contract.
If the outcome of a construction contract cannot be estimated reliably, contract
revenue is recognised to the extent of contract costs incurred that it is probable will be
recoverable.
When it is probable that total contract costs will exceed total contract revenue, the
expected loss is recognised as an expense immediately
Note 2 Revenue
20X1

20X0

CU

CU

1,300

20X1

20X0

Revenue comprises:
Contract revenue

Extract from the notes to the financial statements at 31 December 20X1

Note 4 Amount due from (to) customers

Aggregate of contract costs incurred

and recognised profits and losses
Progress billings
Amount due from (to) customers

Asset

Liability

CU

CU

CU

1,045

185

1,230

(1,000)

(135)

(1,235)

CU

45

IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

(50)

48

Module 23 Revenue
Calculations that do not form part of the disclosures:
Note: the calculations below illustrate the workings only and would not constitute
part of the actual disclosures in the financial statements.

Contract

Contract costs incurred

Less recognised as a separate asset

Recognised profits less recognised

losses

Progress billings
Due from customers
Due to customers

Total

110

510

450

250

100

1,420

(60)

(100)

(45)

(205)

110

450

350

250

55

1,215

35

70

30

(90)

(30)

145

520

380

160

25

1,230

(100)

(520)

(380)

(180)

(55)

(1,235)

45

(20)

IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

(30)

15

45
(50)

49

Module 23 Revenue

Appendix to Section 23
Examples of revenue recognition under the principles in Section 23
This Appendix accompanies, but is not part of, Section 23. It provides guidance for applying the
requirements of Section 23 in recognising revenue.
23A.1 The following examples focus on particular aspects of a transaction and are not a
comprehensive discussion of all the relevant factors that might influence the recognition
of revenue. The examples generally assume that the amount of revenue can be
measured reliably, it is probable that the economic benefits will flow to the entity and the
costs incurred or to be incurred can be measured reliably.

Sale of goods
23A.2 The law in different countries may cause the recognition criteria in Section 23 to be met at
different times. In particular, the law may determine the point in time at which the entity
transfers the significant risks and rewards of ownership. Therefore, the examples in this
appendix need to be read in the context of the laws relating to the sale of goods in the
country in which the transaction takes place.

Example 1 Bill and hold sales, in which delivery is delayed at the

buyers request but the buyer takes title and accepts billing
23A.3 The seller recognises revenue when the buyer takes title, provided:
(a) it is probable that delivery will be made;
(b) the item is on hand, identified and ready for delivery to the buyer at the time the sale
is recognised;
(c) the buyer specifically acknowledges the deferred delivery instructions; and
(d) the usual payment terms apply.
Revenue is not recognised when there is simply an intention to acquire or manufacture
the goods in time for delivery.

Example 2 Goods shipped subject to conditions: installation and

inspection
23A.4 The seller normally recognises revenue when the buyer accepts delivery, and installation
and inspection are complete. However, revenue is recognised immediately upon the
buyers acceptance of delivery when:
(a) the installation process is simple, for example the installation of a factory-tested
television receiver that requires only unpacking and connection of power and
antennae, or
(b) the inspection is performed only for the purposes of final determination of contract
prices, for example, shipments of iron ore, sugar or soya beans.
IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

50

Module 23 Revenue
Example 3 Goods shipped subject to conditions: on approval when
the buyer has negotiated a limited right of return
23A.5 If there is uncertainty about the possibility of return, the seller recognises revenue when
the shipment has been formally accepted by the buyer or the goods have been delivered
and the time period for rejection has elapsed.

Example 4 Goods shipped subject to conditions: consignment

sales under which the recipient (buyer) undertakes to sell the
goods on behalf of the shipper (seller)
23A.6 The shipper recognises revenue when the goods are sold by the recipient to a third party.

Example 5 Goods shipped subject to conditions: cash on delivery

sales
23A.7 The seller recognises revenue when delivery is made and cash is received by the seller
or its agent.

Example 6 Layaway sales under which the goods are delivered

only when the buyer makes the final payment in a series of
instalments
23A.8 The seller recognises revenue from such sales when the goods are delivered. However,
when experience indicates that most such sales are consummated, revenue may be
recognised when a significant deposit is received, provided the goods are on hand,
identified and ready for delivery to the buyer.

Example 7 Orders when payment (or partial payment) is received in

advance of delivery for goods not currently held in inventory, for
example, the goods are still to be manufactured or will be delivered
direct to the buyer from a third party
23A.9 The seller recognises revenue when the goods are delivered to the buyer.

Example 8 Sale and repurchase agreements (other than swap

transactions) under which the seller concurrently agrees to
repurchase the same goods at a later date, or when the seller has a
call option to repurchase, or the buyer has a put option to require
the repurchase, by the seller, of the goods
23A.10 For a sale and repurchase agreement on an asset other than a financial asset, the seller
must analyse the terms of the agreement to ascertain whether, in substance, the risks
and rewards of ownership have been transferred to the buyer. If they have been
transferred, the seller recognises revenue. When the seller has retained the risks and
rewards of ownership, even though legal title has been transferred, the transaction is a
financing arrangement and does not give rise to revenue. For a sale and repurchase
IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

51

Module 23 Revenue
agreement on a financial asset, the derecognition provisions of Section 11 apply.

Example 9 Sales to intermediate parties, such as distributors,

dealers or others for resale
23A.11 The seller generally recognises revenue from such sales when the risks and rewards of
ownership have been transferred. However, when the buyer is acting, in substance, as an
agent, the sale is treated as a consignment sale.

Example 10 Subscriptions to publications and similar items

23A.12 When the items involved are of similar value in each time period, the seller recognises
revenue on a straight-line basis over the period in which the items are dispatched. When
the items vary in value from period to period, the seller recognises revenue on the basis
of the sales value of the item dispatched in relation to the total estimated sales value of all
items covered by the subscription.

Example 11 Instalment sales, under which the consideration is

receivable in instalments
23A.13 The seller recognises revenue attributable to the sales price, exclusive of interest, at the
date of sale. The sale price is the present value of the consideration, determined by
discounting the instalments receivable at the imputed rate of interest. The seller
recognises the interest element as revenue using the effective interest method.

Example 12 Agreements for the construction of real estate

23A.14 An entity that undertakes the construction of real estate, directly or through
subcontractors, and enters into an agreement with one or more buyers before
construction is complete, shall account for the agreement as a sale of services, using the
percentage of completion method, only if:
(a) the buyer is able to specify the major structural elements of the design of the real
estate before construction begins and/or specify major structural changes once
construction is in progress (whether it exercises that ability or not), or
(b) the buyer acquires and supplies construction materials and the entity provides only
construction services.
23A.15 If the entity is required to provide services together with construction materials in order to
perform its contractual obligation to deliver real estate to the buyer, the agreement shall
be accounted for as the sale of goods. In this case, the buyer does not obtain control or
the significant risks and rewards of ownership of the work in progress in its current state
as construction progresses. Rather, the transfer occurs only on delivery of the completed
real estate to the buyer.

IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

52

Module 23 Revenue

Example 13 Sale with customer loyalty award

23A.16 An entity sells product A for CU100. Purchasers of product A get an award credit
enabling them to buy product B for CU10. The normal selling price of product B is CU18.
The entity estimates that 40 per cent of the purchasers of product A will use their award to
buy product B at CU10. The normal selling price of product A, after taking into account
discounts that are usually offered but that are not available during this promotion, is
CU95.
23A.17 The fair value of the award credit is 40 per cent [CU18 CU10] = CU3.20. The entity
allocates the total revenue of CU100 between product A and the award credit by
reference to their relative fair values of CU95 and CU3.20 respectively. Therefore:
(a) Revenue for product A is CU100 [CU95 / (CU95 + CU3.20)] = CU96.74
(b) Revenue for product B is CU100 [CU3.20 / (CU95 + CU3.20)] = CU3.26

Rendering of services

Example 14 Installation fees

23A.18 The seller recognises installation fees as revenue by reference to the stage of completion
of the installation, unless they are incidental to the sale of a product, in which case they
are recognised when the goods are sold.

Example 15 Servicing fees included in the price of the product

23A.19 When the selling price of a product includes an identifiable amount for subsequent
servicing (eg after sales support and product enhancement on the sale of software), the
seller defers that amount and recognises it as revenue over the period during which the
service is performed. The amount deferred is that which will cover the expected costs of
the services under the agreement, together with a reasonable profit on those services.

Example 16 Advertising commissions

23A.20 Media commissions are recognised when the related advertisement or commercial
appears before the public. Production commissions are recognised by reference to the
stage of completion of the project.

Example 17 Insurance agency commissions

23A.21 Insurance agency commissions received or receivable that do not require the agent to
render further service are recognised as revenue by the agent on the effective
commencement or renewal dates of the related policies. However, when it is probable
that the agent will be required to render further services during the life of the policy, the
agent defers the commission, or part of it, and recognises it as revenue over the period
during which the policy is in force.
IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

53

Module 23 Revenue
Example 18 Admission fees
23A.22 The seller recognises revenue from artistic performances, banquets and other special
events when the event takes place. When a subscription to a number of events is sold,
the seller allocates the fee to each event on a basis that reflects the extent to which
services are performed at each event.

Example 19 Tuition fees

23A.23 The seller recognises revenue over the period of instruction.

Example 20 Initiation, entrance and membership fees

23A.24 Revenue recognition depends on the nature of the services provided. If the fee permits
only membership, and all other services or products are paid for separately, or if there is a
separate annual subscription, the fee is recognised as revenue when no significant
uncertainty about its collectibility exists. If the fee entitles the member to services or
publications to be provided during the membership period, or to purchase goods or
services at prices lower than those charged to non-members, it is recognised on a basis
that reflects the timing, nature and value of the benefits provided.

Franchise fees
23A.25 Franchise fees may cover the supply of initial and subsequent services, equipment and
other tangible assets, and know how. Accordingly, franchise fees are recognised as
revenue on a basis that reflects the purpose for which the fees were charged. The
following methods of franchise fee recognition are appropriate.

Example 21 Franchise fees: Supplies of equipment and other

tangible assets
23A.26 The franchisor recognises the fair value of the assets sold as revenue when the items are
delivered or title passes.

Example 22 Franchise fees: Supplies of initial and subsequent

services
23A.27 The franchisor recognises fees for the provision of continuing services, whether part of
the initial fee or a separate fee, as revenue as the services are rendered. When the
separate fee does not cover the cost of continuing services together with a reasonable
profit, part of the initial fee, sufficient to cover the costs of continuing services and to
provide a reasonable profit on those services, is deferred and recognised as revenue as
the services are rendered.
23A.28 The franchise agreement may provide for the franchisor to supply equipment, inventories,
or other tangible assets at a price lower than that charged to others or a price that does
not provide a reasonable profit on those sales. In these circumstances, part of the initial
IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

54

Module 23 Revenue
fee, sufficient to cover estimated costs in excess of that price and to provide a reasonable
profit on those sales, is deferred and recognised over the period the goods are likely to be
sold to the franchisee. The balance of an initial fee is recognised as revenue when
performance of all the initial services and other obligations required of the franchisor
(such as assistance with site selection, staff training, financing and advertising) has been
substantially accomplished.
23A.29 The initial services and other obligations under an area franchise agreement may depend
on the number of individual outlets established in the area. In this case, the fees
attributable to the initial services are recognised as revenue in proportion to the number of
outlets for which the initial services have been substantially completed.
23A.30 If the initial fee is collectible over an extended period and there is a significant uncertainty
that it will be collected in full, the fee is recognised as cash instalments are received.

Example 23 Franchise fees: Continuing franchise fees

23A.31 Fees charged for the use of continuing rights granted by the agreement, or for other
services provided during the period of the agreement, are recognised as revenue as the
services are provided or the rights used.

Example 24 Franchise fees: Agency transactions

23A.32 Transactions may take place between the franchisor and the franchisee that, in
substance, involve the franchisor acting as agent for the franchisee. For example, the
franchisor may order supplies and arrange for their delivery to the franchisee at no profit.
Such transactions do not give rise to revenue.

Example 25 Fees from the development of customised software

23A.33 The software developer recognises fees from the development of customised software as
revenue by reference to the stage of completion of the development, including completion
of services provided for post-delivery service support.

Interest, royalties and dividends

Example 26 Licence fees and royalties

23A.34 The licensor recognises fees and royalties paid for the use of an entitys assets (such as
trademarks, patents, software, music copyright, record masters and motion picture films)
in accordance with the substance of the agreement. As a practical matter, this may be on
a straight-line basis over the life of the agreement, for example, when a licensee has the
right to use specified technology for a specified period of time.

IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

55

Module 23 Revenue

23A.35 An assignment of rights for a fixed fee or non-refundable guarantee under a

non-cancellable contract that permits the licensee to exploit those rights freely and the
licensor has no remaining obligations to perform is, in substance, a sale. An example is a
licensing agreement for the use of software when the licensor has no obligations after
delivery. Another example is the granting of rights to exhibit a motion picture film in
markets in which the licensor has no control over the distributor and expects to receive no
further revenues from the box office receipts. In such cases, revenue is recognised at the
time of sale.
23A.36 In some cases, whether or not a licence fee or royalty will be received is contingent on the
occurrence of a future event. In such cases, revenue is recognised only when it is
probable that the fee or royalty will be received, which is normally when the event has
occurred.

IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

56

Module 23 Revenue

SIGNIFICANT ESTIMATES AND OTHER JUDGEMENTS

Applying the requirements of the IFRS for SMEs to transactions and events often requires
judgement. Information about significant judgements and key sources of estimation
uncertainty are useful in assessing an entitys financial position, performance and cash flows.
Consequently, in accordance with paragraph 8.6, an entity must disclose the judgements that
management has made in the process of applying the entitys accounting policies and that
have the most significant effect on the amounts recognised in the financial statements.
Furthermore, in accordance with paragraph 8.7, an entity must disclose information about the
key assumptions concerning the future, and other key sources of estimation uncertainty at the
reporting date, that have a significant risk of causing a material adjustment to the carrying
amounts of assets and liabilities within the next financial year.
Other sections of the IFRS for SMEs require disclosure of information about particular
judgements and estimation uncertainties.

Recognition
1

Sometimes significant judgement is required in identifying the revenue transaction to which

the revenue recognition criteria must be applied. For example:

When multiple element sales occur, the revenue transaction must be identified so that the
recognition criteria can be applied independently to each separately identifiable
component of the multiple element sale to reflect the substance of the transaction (eg in
substance the entity is selling several goods and services). See examples 13, which
illustrate the requirements of paragraph 23.8.

Sometimes significant judgement is required to determine whether two or more

transactions are linked in such a way that the commercial effect cannot be understood
without reference to the series of transactions as a whole (see paragraph 23.8), eg whether
the sale of goods subject to a repurchase agreement is the sale of goods with a subsequent
repurchase of goods, or a financing transaction with the goods used as collateral for the
loan (see Appendix to Section 23 example 8).

Sometimes when a construction contract covers a number of assets, significant judgement

is required to determine whether each asset is treated as a separate construction contract
(see paragraphs 23.18 and 23.19).

Sometimes significant judgement is required to determine whether a group of contracts,

whether with a single customer or with several customers, must be treated as a single
construction contract (see paragraphs 23.18 and 23.20).

Sometimes significant judgement is required to determine whether an entity is acting as

agent or principal, in particular where the entity has exposure to some but not all of the
significant risks and rewards associated with the sale of goods or the rendering of services
(see example 24 in the Appendix to Section 23 and examples 14, which illustrate the
requirements of paragraph 23.4).

Sometimes significant judgement is required to determine whether sales of assets are part
of the entitys ordinary activities and hence give rise to revenue as opposed to other income
(see example 1, which illustrates the requirements of paragraph 23.1).

IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

57

Module 23 Revenue

Revenue is recognised when it is probable that future economic benefits will flow to the entity
and these benefits can be measured reliably. In some cases significant judgement is required
in determining when the revenue recognition criteria are met. For example:
Significant judgement may be required in determining whether a sale of goods has taken
place when some but not all of the risks and rewards of ownership are passed to the
customer. For example, the transfer of risks and rewards of ownership may take place at a
different time from the transfer of legal title or possession. Furthermore, the law in
different countries may cause the recognition criteria to be met at different times.
In particular, the law may determine the point in time at which the entity transfers the
significant risks and rewards of ownership.
Significant judgement may be required in determining whether it is probable that the
economic benefits associated with the sales transaction will flow to the entity. In some
cases, this may not be probable until the consideration is received or until an uncertainty is
removed. For example, it may be uncertain that a foreign government authority will grant
permission to remit the consideration from a sale in a foreign country. When the
permission is granted, the uncertainty is removed and revenue is recognised.

Significant judgement may be required in assessing whether the outcome of a transaction

involving the rendering of services (including construction services) can be estimated
reliably.

Significant judgement may need to be applied in determining whether, having regard to

the substance of the agreement, it is more appropriate to recognise royalty revenue on
some other systematic and rational basis rather than accruing royalties in accordance with
the terms of the relevant agreement.

Measurement
1

An entity shall measure revenue at the fair value of the consideration received or receivable.
The fair value of the consideration received or receivable takes into account the amount of any
trade discounts and volume rebates allowed by the entity.
In many cases little difficulty is encountered in measuring revenuethe consideration is in the
form of cash or cash equivalents and the amount of revenue is the amount of cash or cash
equivalents received. However, in some cases significant judgement is required. For example:

When the inflow of cash or cash equivalents is deferred, the consideration will need to be
discounted if the effect of discounting is material. Judgement will need to be applied in
determining the imputed rate of interest.

When multiple element sale transactions take place, the recognition criteria may need to
be applied separately to each component of the multiple element sale. Judgement must be
exercised in allocating the fair value of the consideration received or receivable to the
components of the multiple element sale.

When goods are sold or services rendered in exchange for dissimilar goods, judgement may
need to be applied in determining the fair value of the assets exchanged.

For contracts for services and construction contracts spanning several accounting periods,
determining the future costs to be incurred in the transaction often involves significant
estimation and judgement.

IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

58

Module 23 Revenue

COMPARISON WITH FULL IFRSs

Sale of goods, rendering of services, interest, dividends and royalties
Full IFRSs (see IAS 18 Revenue) and the IFRS for SMEs (see Section 23 Revenue) as issued at 9 July
2009 share the same principles for accounting and reporting revenue. However, the IFRS for
SMEs is drafted in simple language and provides less guidance on how to apply the principles.
Furthermore, the disclosure requirements of Section 23 are less detailed than those specified
in IAS 18.
Construction contracts
Full IFRSs (see IAS 11 Construction Contracts) and the IFRS for SMEs (see Section 23 Revenue) as
issued at 9 July 2009 share the same principles for accounting and reporting construction
contracts. However, the IFRS for SMEs is drafted in simple language and provides less guidance
on how to apply the principles. Furthermore, the disclosure requirements of Section 23 are
less detailed than those specified in IAS 11.

IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

59

Module 23 Revenue

TEST YOUR KNOWLEDGE

Test your knowledge of the requirements for accounting and reporting revenue in accordance
with the IFRS for SMEs by answering the questions below.
Once you have completed the test check your answers against those set out below this test.
Assume all amounts are material.
Mark the box next to the most correct statement.

Question 1
Section 23 is applied in accounting for revenue arising from the sale of goods, the rendering of
services, construction contracts in which the entity is the contractor and the use by others of
entity assets yielding interest, royalties or dividends. However, Section 23 does not apply to
revenue arising from:
(a) lease agreements.
(b) changes in the fair value of financial assets and financial liabilities or their disposal.
(c) the initial recognition and changes in the fair value of biological assets related to
agricultural activity.
(d) all of the above.

Question 2
An entity sold a good with a list price (advertised price) of CU1,000 to a customer on normal
credit terms (ie 30 days interest-free credit).
Ten days after the sale the customer paid the entity CU690 in full and final settlement of a
debt that arose from the sale of the goods. CU50 of the amount received from the customer is
sales tax collected by the entity on behalf of the national government.
The difference between the list price and the settlement amount are as follows: CU1,000 list
price less CU200 trade discount less CU100 volume rebate less CU10 prompt settlement
discount.
At what amount should the entity measure revenue from the sale of the good:
(a) CU640
(b) CU1,000
(c) CU700
(d) CU690

IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

60

Module 23 Revenue
Question 3
An entity (the seller) bills a customer for goods that are yet to be delivered to the customer.
Delivery is delayed in accordance with an instruction from the customer. The seller recognises
revenue when the customer takes title, provided:
(a) it is probable that delivery will be made.
(b) the item is on hand, identified and ready for delivery to the customer at the time the
sale is recognised.
(c) the customer specifically acknowledges the deferred delivery instructions.
(d) the usual payment terms apply.
(e) all of the above.

Question 4
An entity must not:
(a) recognise revenue from the sale of goods if it retains significant risks and rewards of
ownership of goods sold.
(b) recognise revenue from the rendering of services using the percentage of completion
method if it cannot estimate the outcome of the transaction reliably.
(c) recognise revenue from a construction contract using the percentage of completion
method if it cannot estimate the outcome of a contract reliably.
(d) recognise revenue from any of (a) to (c) above.

Question 5
The percentage of completion method is applied to recognise revenue from:
(a) the rendering of services and construction contracts.
(b) the rendering of services only when the outcome of the revenue transaction can be
estimated reliably.
(c) construction contracts only when the outcome of the contract can be estimated
reliably.
(d) both (b) and (c) above.

Question 6
In a promotion, a car dealer undertakes to service and maintain cars sold in the promotion
period free of charge for two years from the date of sale. Furthermore, promotion sales are
made on two-year interest-free credit.
The car dealer enters into a sale which has the following separately identified elements to
which the entity must apply the recognition criteria separately:
(a) the sale of goods.
(b) the sale of goods and the rendering of maintenance services.
(c) the sale of goods, the rendering of services and a financing element (interest) related
to the deferred payment for the sale.

IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

61

Module 23 Revenue

Question 7
On 1 January 20X1 an entity incurred CU2,000 selling costs to sell a good for CU95,000.
The sale agreement provided that the customer pay the CU95,000 selling price in full on
31 December 20X1.
The prevailing rate for one-year credit granted to trade customers in the industry is 10% per
year. This is the more clearly determinable way of determining the imputed rate of interest in
accordance with paragraph 23.5.
The entity must measure revenue from the sale of the good at:
(a) CU95,000
(b) CU86,364
(c) CU97,000
(d) CU93,000

Question 8
A construction contractor builds a home under a contract with a fixed price of CU1,000,000.
The contractor incurred contract costs of CU10,000, CU890,000 and CU200,000 in 20X1, 20X2
and 20X3 respectively. At the end of 20X1 the outcome of the transaction cannot be estimated
reliably however it is probable that the costs incurred in 20X1 will be recoverable. At the end
of 20X2 the contractor can estimate the outcome of the contract reliably and estimates costs to
complete the contract at CU200,000. The contract was completed in 20X3.
The contractor determines the stage of completion of the construction contract by reference to
the proportion that costs incurred for work performed to date bear to the estimated total
costs.
In 20X2 the contractor must:
(a) recognise contract revenue of CU818,182 and contract costs of CU900,000.
(b) recognise contract revenue of CU808,182 and contract costs of CU890,000.
(c) recognise contract revenue of CU808,182 and contract costs of CU908,182.
(d) recognise contract revenue of CU808,182 and contract costs of CU900,000.

IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

62

Module 23 Revenue

Question 9
A construction contractor builds a home under a contract with a fixed price of CU1,000,000.
The contractor incurred contract costs of CU200,000, CU400,000 and CU100,000 in 20X1, 20X2
and 20X3 respectively. At the end of 20X1 the contractor estimated (with sufficient reliability)
the future costs to complete the contract as CU400,000. At the end of 20X2 the contractor
estimated (with sufficient reliability) the future costs to complete the contract as CU150,000.
The contract was completed in 20X3.
The contractor determines the stage of completion of the construction contract by reference to
the proportion that costs incurred for work performed to date bear to the estimated total
costs.
The contractor must recognise contract revenue at:
(a) CU333,333 in 20X1, CU466,667 in 20X2 and CU200,000 in 20X3.
(b) CU1,000,000 in 20X1, CU0 in both 20X2 and 20X3.
(c) CU0 in both 20X1 and 20X2 and CU1,000,000 in 20X3.
(d) CU333,333 in 20X1, CU333,333 in 20X2 and CU333,333 in 20X3.

Question 10
Consider the information in Question 9. However, in this example, contract costs incurred at
the end of 20X2 included CU50,000 prepaid wages.
The contractor must recognise contract revenue at:
(a) CU333,333 in 20X1, CU466,667 in 20X2 and CU200,000 in 20X3.
(b) CU333,333 in 20X1, CU400,000 in 20X2 and CU266,667 in 20X3.
(c) CU0 in 20X1 and 20X2 and CU1,000,000 in 20X3.
(d) CU333,333 in 20X1, CU333,333 in 20X2 and CU333,333 in 20X3.

IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

63

Module 23 Revenue

Answers
Q1
Q2

Q3
Q4
Q5
Q6
Q7
Q8

(d) see paragraph 23.2

(a) see paragraph 23.3
Calculation: CU1,000 list price less CU200 trade discount less CU100 volume rebate less
CU10 prompt-settlement discount less CU50 sales tax collected on behalf of the
government = CU640.
(e) see paragraph 23A.3
(d) see paragraphs 23.10(a), 23.14, 23.16, 23.17 and 23.25
(d) see paragraphs 23.14 and 23.17
(c) see paragraph 23.8
(b) calculation: CU95,000 1.1 = CU86,364. see paragraph 23.5
(c) Calculations:
Revenue = CU900,000 costs incurred to relating to work performed date CU1,100,000
total expected contract costs = 81.82% stage of completion. 81.82% CU1,000,000
contract price = CU818,182 contract revenue recognised up to the end of 20X2.
CU818,182 less CU10,000 revenue recognised in 20X1limited to recoverable contract
costs = CU808,182 recognised in 20X2.
Cost = 81.82% CU1,100,000 total expected contract costs = CU900,000 contract costs
recognised up to the end of 20X2. CU900,000 less CU10,000 costs recognised in 20X1 =
CU890,000 recognised in 20X2. However, total contract costs are expected to exceed total
expected contract revenue, therefore an additional loss must be recognised in respect of
the onerous contract, ie 18.18% (the percentage of future activity on the contract)
CU100,000 the excess of total expected contract costs over total expected contract
revenue = CU18,182.
Expense = CU908,182 (ie CU890,000 incurred to date + CU18,182 in respect of the onerous
contract).

Q9

(a) Calculations:
20X1: CU200,000 costs incurred relating to work performed to date CU600,000 total
expected contract costs = 33.33% stage of completion. 33.33% CU1,000,000 contract
price = CU333,333 contract revenue recognised in 20X1.
20X2: CU600,000 costs incurred relating to work performed to date CU750,000 total
expected contract costs = 80% stage of completion. 80% CU1,000,000 contract price
(contract revenue recognised up to the end of 20X2) less CU333,333 (contract revenue
recognised in 20X1) = CU466,667 contract revenue recognised in 20X2.
20X3: CU1,000,000 contract price less CU800,000 (contract revenue recognised up to the
end of 20X2) = CU200,000 contract revenue recognised in 20X3.

IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

64

Module 23 Revenue
Q10 (b) Calculations:
20X1: CU200,000 costs incurred relating to work performed to date CU600,000 total
expected contract costs = 33.33% stage of completion. 33.33% CU1,000,000 contract
price = CU333,333 contract revenue recognised in 20X1.
20X2: (CU600,000 CU50,000 prepayment) = CU550,000 costs incurred relating to work
performed to date. CU550,000 + CU50,000 prepayment + CU150,000 expected future
contract costs = CU750,000 total expected contract costs.
CU550,000 contract costs incurred relating to work performed to date CU750,000 total
expected contract costs = 73.33% stage of completion. 73.33% CU1,000,000 contract
price (contract revenue recognised up to the end of 20X2) less CU333,333 (contract
revenue recognised in 20X1) = CU 400,000 contract revenue recognised in 20X2.
20X3: CU1,000,000 contract price less CU733,333 (contract revenue recognised up to the
end of 20X2) = CU 266,667 contract revenue recognised in 20X3.

IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

65

Module 23 Revenue

APPLY YOUR KNOWLEDGE

Apply your knowledge of the requirements for accounting and reporting events after the end
of the reporting period in accordance with the IFRS for SMEs by solving the case studies below.
Once you have completed the test check your answers against those set out at below this test.

Case study 1
SME A entered into a contract with a customer to supply and install a machine on 1 January
20X1 and to service the machine on 1 July 20X1 and 1 January 20X2. The cost of the machine
to entity A is CU80,000. It is possible for a customer to purchase both the machine and the
maintenance services separately.
The customer is contractually obliged to pay entity A CU200,000 on 1 January 20X2.
The prevailing rate for one-year credit granted to trade customers in the industry is 5 per cent
per six-month period. This is the more clearly determinable way of establishing the imputed
rate of interest under paragraph 23.5.
Experience has shown that the servicing of a machine of the model sold to the customer is
expected to cost entity SME A CU15,000 to perform the first service and CU25,000 to perform
the second service. Assume actual costs equal expected costs. When entity A provides
machine services to customers in a separate transaction it earns a margin of 50 per cent on
cost.
On 1 January 20X1 the cash selling price of a machine of the model sold to the customer is
CU125,964.
Part A:
Identify the components of the transaction that entity SME A must apply the revenue
recognition criteria to separately.
Part B:
Calculate the amount of revenue SME A must allocate to each component of the
transaction.
Part C:
Prepare accounting entries to record the information set out above in the accounting
records of SME A for the years ended 31 December 20X1 and 20X2.
Part D:
Draft an extract showing how revenue could be presented and disclosed in the financial
statements of SME A for the year ended 31 December 20X2.

IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

66

Module 23 Revenue

Answer to case study 1

Part A:

On 1 January 20X1 entity A entered into a single transaction with three identifiable separate
components:

sale of a good (the machine);

rendering of services (machine maintenance services on 1 July 20X1 and 1 January 20X2);
and

providing finance (sale of the machine and rendering of services on extended period
credit).

Part B:

Working for receivablecalculate using a spreadsheet or a financial calculator

Opening
Date

balance

Interest

01/01/20X1
01/07/20X1

125,964

125,964

6,298

22,500

154,762

(b)

162,500

37,500

(200,000)

01/01/20X2

162,500

5% CU154,762 = CU7,738

Closing balance

7,738

5% CU125,964 = CU6,298

Payment

125,964

154,762

(b)

Services

(a)

31/12/20X1

(a)

Goods

SME A must allocate the fair value of the consideration receivable from the customer to the
three separately identified components of the transaction. As a first step, it must use the
discount rate of 5 per cent per six-month period to determine the interest revenue component.
Furthermore, one method of determining the amount of revenue attributable to machine
maintenance services is using the margin the entity applies to separate machine maintenance
services. In this case the selling price of the machine is the residual (ie CU125,964). The basis
of allocation between the sale of goods and the rendering of services is reasonable as the
residual equals the cash selling price of the machine.
SME A must apply the recognition criteria to the separately identified components of the
transaction (for the sale of the good see paragraphs 23.1023.13, for the rendering of services
see paragraphs 23.1423.16 and for the financing transaction see paragraphs 23.2823.29(a)).

Part C:
1 January 20X1
Dr

Trade receivable

CU125,964

Cr Profit or lossrevenue from the sale of goods

(a)

CU125,964

To recognise revenue from the sale of the machine on credit.

IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

67

Module 23 Revenue
Dr

Profit or losscost of sales

CU80,000

Cr Inventories

CU80,000

To recognise the cost of the goods sold.

1 January 20X1 to 30 June 20X1

Dr

Trade receivable

CU6,298

(a)

Cr Profit or lossinterest revenue

CU6,298

To recognise revenue from the use by others of entity asset (outstanding trade receivable) yielding interest.

1 July 20X1
Dr

Trade receivable

CU22,500

(a)

Cr Profit or lossrevenue from the rendering of services

CU22,500

To recognise revenue from the rendering of maintenance services.

Dr

Profit or losscost of services

CU15,000

Cr Cash or payables

CU15,000

To recognise the cost of performing maintenance services.

1 July 20X1 to 31 December 20X1

Dr

Trade receivable

CU7,738

(a)

Cr Profit or lossinterest revenue

CU7,738

To recognise revenue form the use by others of entity asset (outstanding trade receivable) yielding interest.

1 January 20X2
Dr

Trade receivable

CU37,500

(a)

Cr Profit or lossrevenue from the rendering of services

CU37,500

To recognise revenue from the rendering of maintenance services.

Dr

Profit or losscost of services

CU25,000

Cr Cash or payables

CU25,000

To recognise the cost of performing maintenance services.

Dr

Cash

CU200,000

Cr Trade receivable

CU200,000

To recognise the receipt of cash from the customer.

(a)

See the working in Part B above.

IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

68

Module 23 Revenue

Part D:
SME A
Notes to the financial statements for the year ended 31 December 20X2
Note 1 Accounting policies

Revenue recognition
Revenue is measured at the fair value of the consideration received or receivable, net of
discounts and sales related taxes.
Revenue from the sale of machinery is recognised when the customer has accepted delivery of
the machinery and inspected its installation.
Revenue from the rendering of machine maintenance services is recognised when the outcome
can be measured reliably by reference to the stage of completion of the transaction using the
proportion that costs incurred for work performed to date bear to estimated total costs.
Interest revenue is recognised using the effective interest method when it is probable that the
economic benefits associated with the transaction will flow to the entity and the amount of
the revenue can be measured reliably.
Note 5 Revenue

Sale of goods
Rendering of machine-maintenance services
Interest

IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

20X2

20X1

CU

CU

125,964

37,500

22,500

7,738

6,298

45,238

154,762

69

Module 23 Revenue
Case study 1
In December 20X1 entity SME B entered into a contract to construct a luxury yacht for a
customer for a fixed price of CU2,000,000. In accordance with the agreement for the
construction of the yacht the customer is able to specify the major structural elements of the
design of the yacht before construction begins and can specify major structural changes once
construction is in progress.
In 20X3 the customer requested, and entity B accepted a variation to the contract.
The variation requires entity B to include additional fixtures in the yacht in exchange for
CU500,000 additional consideration.
In 20X4 the price of the material used to construct and fit the yacht increased significantly.
Cost information:
(amounts in CU)

31/12/20X1

31/12/20X2

31/12/20X3

31/12/20X4

31/12/20X5

Cumulative costs incurred to date

50,000

250,000

1,000,000

1,900,000

2,550,000

Expected costs to complete

1,450,000

1,350,000

1,200,000

700,000

Total expected costs

1,500,000

1,600,000

2,200,000

2,600,000

2,550,000

SME B determines the stage of completion of the contract by calculating the proportion that
contract costs incurred for work performed to date bear to the latest estimated total contract
costs. However, entity SME B bills the customer amounts determined periodically by
independent surveys of work stage of completion of the yacht. Entity SME B billed the
customer and received payment from the customer, as follows:
(amounts in CU)
Progress billings in the year
Paid in the year
Outstanding at the year end

31/12/20X1

31/12/20X2

31/12/20X3

31/12/20X4

31/12/20X5

55,000

245,000

955,000

945,000

300,000

300,000

955,000

545,000

700,000

55,000

400,000

Part A
Prepare accounting entries to record the information set out above in the accounting
records of entity B for the years ended 31 December 20X120X5.
Part B
The facts are the same as part A. However, in this part, the agreement for the construction of
the yacht provides the customer with only limited ability to influence the design of the yacht
(eg to select a design from a range of options specified by the yacht constructor and to specify
only minor variations to the basic design, but the customer cannot specify or alter major
structural elements of the yacht). In the jurisdiction, no rights to the underlying yacht are
transferred to the buyer otherwise than through the agreement. Consequently, the
construction takes place regardless of whether sale agreements exist.
Prepare accounting entries to record the information set out above in the accounting
records of SME B for the years ended 31 December 20X120X5.

IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

70

Module 23 Revenue

Answer to case study 2Part A

In 20X1
Dr

Trade receivable

CU55,000
(a)

CU55,000

Cr Contract accountyacht

To recognise a receivable for contract work performed (as certified) in 20X1.

Dr

Contract account yacht

CU50,000

Cr Cash

CU50,000

To recognise cost incurred in 20X1 for contract work.

31 December 20X1
Dr

Profit or losscontract expenses

Dr

Contract accountyacht

(a)

(b)

CU50,000
CU16,667

Cr Profit or losscontract revenue

CU66,667

(c)

To recognise revenue and expenses from providing construction services in 20X1.

In 20X2
Dr

Trade receivable

CU245,000
(a)

CU245,000

Cr Contract accountyacht

To recognise a receivable for contract work performed (as certified) in 20X2.

Dr

Cash

CU300,000

Cr Trade receivable

CU300,000

To recognise payments received from the customer in 20X2.

Dr

(a)

Contract account yacht

CU200,000

Cr Cash

CU200,000

To recognise cost incurred in 20X2 for contract work.

31 December 20X2
Dr

Profit or losscontract expenses

Dr

Contract accountyacht

(a)

(d)

CU200,000
CU45,833

Cr Profit or losscontract revenue

CU245,833

(e)

To recognise revenue and expenses from providing construction services in 20X2.

IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

71

Module 23 Revenue
In 20X3
Dr

Trade receivable

CU955,000
(a)

Cr Contract accountyacht

CU955,000

To recognise a receivable for contract work performed (as certified) in 20X3.

Dr

Cash

CU955,000

Cr Trade receivable

CU955,000

To recognise payments received from the customer in 20X3.

Dr

(a)

CU750,000

Contract account yacht

Cr Cash

CU750,000

To recognise cost incurred in 20X3 for contract work.

31 December 20X3
Dr
Dr

Profit or losscontract expenses

(a)

Contract accountyacht

(f)

CU750,000
CU73,864

Cr Profit or losscontract revenue

CU823,864

(g)

To recognise revenue and expenses from providing construction services in 20X3.

In 20X4
Dr

Trade receivable

CU945,000
(a)

CU945,000

Cr Contract accountyacht

To recognise a receivable for contract work performed (as certified) in 20X4.

Dr

Cash

CU545,000

Cr Trade receivable

CU545,000

To recognise payments received from the customer in 20X4.

Dr

(a)

CU900,000

Contract account yacht

Cr Cash

CU900,000

To recognise cost incurred in 20X4 for contract work.

31 December 20X4
Dr

Profit or losscontract expenses

(h)

CU900,000

(a)

Cr Contract accountyacht

CU209,441

Cr Profit or losscontract revenue

CU690,559

(i)

To recognise revenue and expenses from providing construction services in 20X4.

Dr

Profit or lossprovision for expected loss

CU26,923

(j)

Cr Provision for expected loss (liability)

CU26,923

To recognise the expected loss for providing future construction services on onerous contracts.
IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

72

Module 23 Revenue

In 20X5
Dr

Trade receivable

CU300,000
(a)

CU300,000

Cr Contract accountyacht

To recognise a receivable for contract work performed (as certified) in 20X5.

Dr

Cash

CU700,000

Cr Trade receivable

CU700,000

To recognise payments received from the customer in 20X5.

Dr

(a)

CU650,000

Contract account yacht

Cr Cash

CU650,000

To recognise cost incurred in 20X5 for contract work.

31 December 20X5
Dr
Dr

(k)

Profit or losscontract expenses

CU650,000

(a)

CU23,077

Contract accountyacht

Cr Profit or losscontract revenue

CU673,077

(l)

To recognise revenue and expenses from providing construction services in 20X5.

Dr

Provision for expected loss (liability)

CU26,923

(j)

Cr Profit or lossprovision for expected loss

CU26,923
To recognise the reversal of the prior period provision for expected loss for providing future construction services
on onerous contracts.

The calculations and explanatory notes below do not form part of the answer to this case
study:
Summary of financial performance:
31/12/20X2

31/12/20X1

CU

CU
Revenue
Expenses
Profit

31/12/20X3

66,667

(c)

(50,000)

(b)

CU

245,833

(e)

(200,000)

(d)

16,667

31/12/20X4

45,833

31/12/20X5

CU

823,864

(g)

690,559

(750,000)

(f)

(926,923)

73,864

CU
(i)

673,077

(h)+(j)

(623,077)

(236,364)

(l)
(k)-(j)

50,000

Summary of financial position:

Cumulative costs incurred to date

Cumulative profit(loss) to date
Cumulative progress billings to date
Gross amount due from (to) the
(a)
customer for contract work

31/12/20X1

31/12/20X2

31/12/20X3

31/12/20X4

31/12/20X5

CU

CU

CU

CU

CU

50,000

250,000

1,000,000

1,900,000

2,550,000

16,667

62,500

136,364

(100,000)

(50,000)

(55,000)

(300,000)

(1,255,000)

(2,200,000)

(2,500,000)

11,667

12,500

IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

(118,636)

(400,000)

73

Module 23 Revenue

(a)

The balance on this account at the end of a reporting period is presented as the amount due from the
customer if the account is in debit (an asset) or the amount due to the customer if the account is in credit (a
liability).

(b)

Contract expense 20X1 = CU50,000 (cost incurred in 20X1).

(c)

Contract revenue 20X1 = contract price x percentage of completion. CU2,000,000 (contract price)
[CU50,000 (cumulative costs incurred to date) CU1,500,000 (total expected costs)] (percentage of
completion) = CU66,667 contract revenue recognised in 20X1.

(d)

Contract expense 20X2 = CU250,000 (cumulative costs incurred to date) less CU50,000 (cost incurred in
20X1) = CU200,000 (cost incurred in 20X2).

(e)

Contract revenue 20X2 = contract price x percentage of completion less contract revenue 20X1.
CU2,000,000 (contract price) [CU250,000 (cumulative costs incurred to date) CU1,600,000 (total
(c)
expected costs)] (percentage of completion) less CU66,667 = CU245,833

(f)

Contract expense 20X3 = CU1,000,000 (cumulative costs incurred to date) less CU50,000 (cost incurred in
20X1) less CU200,000 (cost incurred in 20X2) = CU750,000 (cost incurred in 20X3).

(g)

Contract revenue 20X3 = contract price percentage of completion less contract revenue 20X1 less contract
revenue 20X2. CU2,500,000 (contract price) [CU1,000,000 (cumulative costs incurred to date)
(c)
(e)
CU2,200,000 (total expected costs)] (percentage of completion) less CU66,667 less CU245,833 =
CU823,864

(h)

Contract expense 20X4 = CU1,900,000 (cumulative costs incurred to date) less CU50,000 (cost incurred in
20X1) less CU200,000 (cost incurred in 20X2) less CU750,000 (cost incurred in 20X3) = CU900,000 (cost
incurred in 20X4).

(i)

Contract revenue 20X4 = contract price x percentage of completion less contract revenue 20X1 less contract
revenue 20X2 less contract revenue 20X3. CU2,500,000 (contract price) [CU1,900,000 (cumulative costs
(c)
incurred to date) CU2,600,000 (total expected costs)] (percentage of completion) less CU66,667 less
(e)
(g)
CU245,833 less CU823,864 = CU690,559

(j)

(100% less 73.077% percentage of completion already recognised) = 26.923%. 26.923% (CU2,600,000
total expected contract costs less CU2,500,000 contract price (including variation)) = CU26,923 expected
loss relating to future contract activity accrued for in 20X4.

(k)

Contract expense 20X5 = CU2,550,000 (cumulative costs incurred to date) less CU50,000 (cost incurred in
20X1) less CU200,000 (cost incurred in 20X2) less CU750,000 (cost incurred in 20X3) less CU900,000 (cost
incurred in 20X4) = CU650,000 (cost incurred in 20X5).

(l)

Contract revenue 20X5 = contract price x percentage of completion less contract revenue 20X1 less contract
revenue 20X2 less contract revenue 20X3 less contract revenue 20X4. CU2,500,000 (contract price)
[CU2,550,000 (cumulative costs incurred to date) CU2,550,000 (total expected costs)] (percentage of
(c)
(e)
(g)
(i)
completion) less CU66,667 less CU245,833 less CU823,864 less CU690,559 = CU673,077

(m)

CU1,900,000 cumulative costs incurred to date CU2,600,000 total expected costs = 73.077% complete at
31 December 20X4.

(m)

IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

74

Module 23 Revenue

Answer to case study 2Part B

Notes:
In this example (part 2) the terms of the agreement and all the surrounding facts and
circumstances indicate that the agreement is not a construction contract. The agreement is a
forward contract that gives the buyer an asset in the form of a right to acquire, use and sell the
completed yacht at a later date and an obligation to pay the purchase price in accordance with
its terms. Although the buyer might be able to transfer its interest in the forward contract to
another party, the entity retains control and the significant risks and rewards of ownership of
the work in progress in its current state until the completed yacht is transferred. Therefore,
revenue should be recognised only when all the criteria in paragraph 23.10 are met (at
completion in this example).

Answer:

In 20X1
Dr

Inventories yacht

CU50,000

Cr Cash

CU50,000

To recognise cost incurred in construction of inventoryyacht.

In 20X2
Dr

Cash

CU300,000

Cr liabilityadvance from customer

CU300,000

To recognise payments received from the customer in 20X2.

Dr

Inventories yacht

CU200,000

Cr Cash

CU200,000

To recognise cost incurred in construction of inventoryyacht.

In 20X3
Dr

Cash

CU955,000

Cr liabilityadvance from customer

CU955,000

To recognise payments received from the customer in 20X3.

Dr

Inventories yacht

CU750,000

Cr Cash

CU750,000

To recognise cost incurred in construction of inventoryyacht.

IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

75

Module 23 Revenue

In 20X4
Dr

Cash

CU545,000

Cr liabilityadvance from customer

CU545,000

To recognise payments received from the customer in 20X4.

Dr

Inventories yacht

CU900,000

Cr Cash

CU900,000

To recognise cost incurred in construction of inventoryyacht.

31 December 20X4
Dr

Profit or lossimpairment of inventory

(a)

CU100,000

Cr Inventories yacht

CU100,000

To recognise the impairment loss in respect of an onerous contract for the forward sale of a yacht.
In 20X5
Dr

Cash

CU700,000

Cr liabilityadvance from customer

CU700,000

To recognise payments received from the customer in 20X5.

Dr

Inventories yacht

CU650,000

Cr Cash

CU650,000

To recognise cost incurred in construction of inventoryyacht.

Dr

Inventories yacht

CU50,000

Cr Profit or lossreversal of prior period impairment of

inventories

CU50,000

To recognise the reversal of the prior period impairment of inventoryyacht.

Dr

Liabilityadvance from customer

CU2,500,000

(b)

Cr Profit or lossrevenue
CU2,500,000
To recognise revenue from the sale of the yacht and the extinguishment of the liability to the customer in 20X5.
Dr

Profit or losscost of goods sold

CU2,550,000

Cr Inventoriesyacht
To derecognise the inventory sold.

CU2,550,000

The calculations and explanatory notes below do not form part of the answer to this case study:
(a)

CU2,500,000 selling price less CU700,000 expected costs to complete = CU1,800,000 selling price less
costs to complete. CU1,900,000 carrying amount less CU1,800,000 selling price less costs to complete =
CU100,000 loss.

(b)

CU2,000,000 original contract price + CU500,000 variation = CU2,500,000.

IFRS Foundation: Training Material for the IFRS for SMEs (version 2013-1)

76