I n t e r a c t I v e t e X t foundations in Accountancy/ acca financial accounting (ffa/FA) bpp learning Media is an acca approved Content Provider

PART F: PREPARING BASIC FINANCIAL STATEMENTS 

 

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 

If a customer is expected to take up a cash/settlement discount allowed, the discount is deducted 

from the invoiced amount when recording the revenue. If the customer subsequently does not take 

up the discount, the discount is then recorded as revenue. 

 

If the customer is not expected to take up the discount, the full invoiced amount is recognised as 

revenue when recording the sale. If the customer subsequently does take up the discount, revenue 

is then reduced by the discount. 

This was covered in more detail in Section 2, Chapter 14. 

7.5 Example: Revenue recognition 

In this example, the five step model is applied to a simple sales transaction involving the sale of a single 

product. 

TDF is a company that manufactures office furniture. A customer placed an order on 22 December 20X4 

for an office desk at a price of $300 plus sales tax at 20% of $60. The desk was delivered to the 

customer on 25 January 20X5, who accepted the goods as satisfactory by signing a delivery note. TDF 

then invoiced the customer for the goods on 1 February 20X5. The customer paid $360 to TDF on 

1 March 20X5. 

Required 

How should TDF account for revenue? 

Solution 

Applying the five step model: 

(1) 

Identify the contract(s) with a customer: 

A customer placed an order for a desk. This represents a contract to supply the desk.  

(2) 

Identify the performance obligations in the contract: 

There is one performance obligation, the delivery of a satisfactory desk. 

(3) 

Determine the transaction price: 

This is the price agreed as per the order, ie $300. Note that sales tax is not included since 

transaction price as defined by IFRS 15 does not include amounts collected on behalf of third 

parties.  

(4) 

Allocate the transaction price to the performance obligations in the contract: 

There is one performance obligation, therefore the full transaction price is allocated to the 

performance of the obligation of the delivery of the desk. 

(5) 

Recognise revenue when (or as) the entity satisfies a performance obligation: 

Since the customer has signed a delivery note to confirm acceptance of the goods as satisfactory, 

this is evidence that TDF has fulfilled its performance obligation and can therefore recognise $300 

in January 20X5.  

Note. The timing of payment by the customer is irrelevant to when the revenue is recognised. 

For most simple transactions with a single performance obligation, the full transaction price will be 

recognised when control of goods or services has transferred to the customer.  

It gets more complex however when there are multiple performance obligations, eg, as mentioned in the 

previous section, the sale of a cell phone contract. This often involves a 'free' phone and monthly network 

service bundled together as a single monthly fee. In this scenario there are two performance obligations; 

the delivery of the phone at the start of the contract and the network service. The transaction price of the 

monthly fee would need to be apportioned between these two performance objectives and recognised 

thereon.  

Don’t worry about learning this particular example, since long-term contracts are beyond scope of this 

syllabus. However it is shown here to demonstrate how the standard is applied to more complex revenue 

arrangements. 

 

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CHAPTER 20  

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  PREPARATION OF FINANCIAL STATEMENTS FOR COMPANIES