(Posted April 2025)
Accounting for revenue tends to be a commonly tested topic on the CFE, and there are several different types of revenue recognition concerns that may arise. This guide will focus on some of the key technical considerations under IFRS® Standards 15, Revenue from Contracts with Customers.
Sale of Goods and Rendering of Services
This issue requires an assessment of the appropriate timing for revenue recognition. Typically, the case will provide a detailed set of facts relating to the sale of goods and/or rendering of services and will indicate that the entity in question has either recorded or not recorded the related revenue during the fiscal period. You will need to determine whether this is appropriate, using the concepts and steps explained below.
Five-Step Process
The general revenue recognition steps under IFRS 15 can be applied to both the sale of goods and rendering of services. In most revenue scenarios, all five of the steps noted below should be assessed:
- Identify the contract
- Identify the performance obligations
- Determine the transaction price
- Allocate the transaction price to the performance obligations
- Determine when/how to recognize revenue
Step 1 – Identify the contract
There are five relevant criteria that must all be met for a contract to exist:
- It is approved by all parties
- The rights relating to the goods/services to be transferred can be identified
- The payment terms can be identified
- The contract has commercial substance
- It is probable that the entity will collect the consideration from the customer
Step 2 – Identify the performance obligations
The number of performance obligations in the contract must be determined. A performance obligation exists if one of the following is transferred to a customer:
- A distinct good or service (or bundle of goods or services)
- A series of distinct goods or services that have the same pattern of transfer and are substantially the same for the customer
In determining whether a good or service is distinct, two concepts must be met:
- The customer can benefit from the good or service on its own
- The entity’s promise to transfer the good or service is separately identifiable from other contractual promises
Step 3 – Determine the transaction price
The transaction price is the amount of consideration that the entity expects to be entitled to in exchange for transferring the good or service to a customer. When assessing the transaction price, it is important to consider the terms of the contract, customary business practices of the entity, and other factors, such as variable consideration. Variable consideration includes elements such as discounts, rebates, refunds, credits, penalties, and contingencies based on future events that impact the amount to be received.
Step 4 – Allocate the transaction price to the performance obligations
You may need to assess how to allocate the transaction price to each performance obligation, if more than one exists. The transaction price should be allocated based on the stand-alone selling price of each distinct good or service at the inception of the contract.
Step 5 – Determine when/how to recognize revenue
To determine when to recognize revenue for each performance obligation, assess whether the obligation is satisfied at a point in time, or over time. The performance obligation is considered to be transferred to a customer when the customer obtains control of the asset.
For the entity to transfer control of the good or service over time, one of the following criteria must be met:
- The customer simultaneously receives and consumes the benefits provided the entity’s performance
- The entity’s performance creates or enhances an asset that the customer controls
- The entity’s performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for completed performance
If one of the above is met, you may need to determine how to measure the revenue over time, based on progress towards complete satisfaction of the performance obligation. This can be done using either an output method or an input method.
- Output methods recognize revenue based on measurements of value to the customer and include examples such as surveys of performance completed to date, milestones reached, time elapsed, units produced, or units delivered.
- Input methods recognize revenue based on the entity’s efforts or inputs incurred to satisfy the performance obligation, and include examples such as resources consumed, labour hours expended, or costs incurred. If an entity’s efforts or inputs are expended evenly throughout the performance period, it may be appropriate to recognize revenue on a straight-line basis.
If none of the above criteria are met, the performance obligation is considered to be satisfied at a point in time. To determine the point in time at which to recognize revenue, the entity must assess the indicators of the transfer of control, the latest of which represents when revenue can be recognized:
- The entity has a present right to payment for the asset
- The customer has legal title to the asset
- The entity has transferred physical possession of the asset
- The customer has the significant risks and rewards of ownership of the asset
- The customer has accepted the asset
In instances where the sale has a right of return, the entity must recognize revenue for the transferred products not expected to be returned, a refund liability, and an asset for its right to recover products from customers on settling the refund liability.
How to Write on the CFE
While you must adapt to the issue and case facts presented to you, there is a common approach that can often be taken to develop sufficient depth in your analysis.
1. Assess the relevant criteria within each step using case facts
It is ideal to use a “bullet-point” structure when formatting your response, in which the relevant steps (and associated criteria for certain areas) are listed out, and case facts are applied beside each, along with a clear conclusion as to whether each criterion is “met” or “not met” at a particular point in time.
Professional judgment will need to be exercised regarding how much detail to go into for each step. For example, if it is very clear from the case facts that a contract exists, it is not necessary to assess all five criteria explicitly when assessing Step 1 (identifying the contract) during a time-constrained exam. If the situation is focused only on a specific portion of a revenue transaction, rather than the entire contract, the analysis may focus on a single concept or step (e.g., being asked to discuss the treatment of loyalty points issued).
2. Conclude
Using your analysis above, conclude as to when revenue should be recognized. Assuming sufficient information is provided, quantify the relevant adjustment required, especially if the entity already recorded an amount in error. When concluding, if revenue should be deferred and recognized in a future period, it is important to explain when and how it should be recognized in that period (do not simply conclude to defer it in the current period).
Other Issues
While not an exhaustive list, below are some examples of other revenue recognition issues that could arise, either separate from, or in conjunction with, the above examples.
Bill and hold
This is when an entity bills a customer for a product but does not physically send the goods to them until a future date. In these situations, when delivery has not yet occurred, revenue can only be recognized if each of the following conditions have been met:
- The reason for the bill-and-hold arrangement is substantive
- The product is identified separately by the seller as belonging to the specific customer
- The product is currently ready to be physically transferred to the customer
- The entity does not have the ability to use the product or to direct to another customer
Consignment
This is when an entity (consignor) delivers a product to another party (consignee) to sell it on their behalf. If the product does not sell, it can be returned to the consignor without an obligation to pay for the product. In such situations, performance is not achieved when the consignor transfers the product to the consignee, and revenue should only be recognized when the consignee sells the product.
Customer options for additional goods and services
This applies to situations where a revenue-generating contract provides options to customers to acquire additional goods or services for free or at a discount. Examples include sales incentives, customer loyalty programs, and discounts on future goods and services. If the option provides the customer with a material right that it would not otherwise receive without entering into the contract, the option is considered as a separate performance obligation. The entity must allocate the transaction price to each performance obligation in the contract on a relative stand-alone selling price basis. Revenue for these two sources must be accounted for separately based on when the performance obligation is satisfied. Deferred revenue is recorded at the time of sale, representing the value of the good or service to be provided in the future.
Gross vs. net
When an entity is engaged in a revenue-generating relationship with a third party, either through the sale of goods or rendering of services, you must determine whether it is the principal or an agent.
- The principal records revenue on a gross basis
- An agent records the commission (net) amount as revenue
To determine whether an entity is a principal or agent in the transaction, use case facts to assess whether the entity:
- Is primarily responsible for fulfilling the promise to provide the specified good or service
- Has inventory risk before and/or after the specified good or service has been transferred to a customer
- Has discretion in establishing the price for the specified good or service
Remember to conclude on the appropriate treatment based on an overall evaluation of the factors.
Non-refundable upfront fees
When an entity charges a customer a non-refundable upfront fee at contract inception, the entity must assess whether the fee relates to the transfer of a promised good or service, or whether it is an advance payment for future goods or services. If it relates to a good or service, a determination must be made as to whether it is a separate performance obligation when assessing how to record the revenue. If it is considered an advance payment for future goods or services, it would be recognized as revenue only when those future goods or services are provided.