REVENUE

(Revision 1)

PREFACE This series of workbooks has been updated by the project team of the European
Union project Implementation of the Accounting Reform in the Russian
Federation.

www.accountingreform.ru
 Revenue

The Workbook Series consists of a range of titles listed on our website.

The workbooks cover the concepts of International Financial Reporting
Standards (‘IFRS’). They are intended to be practical self-instruction aids The copyright of the material contained in each workbook belongs to the
that practicing accountants can use to upgrade their knowledge, understanding European Union and, according to its policy, may be used free of charge for
and skills. any non-commercial purpose.

Each workbook is designed for a maximum of three hours of study. The project team would like to express thanks to those who have contributed
their time and thoughts to the content of the workbooks.
Each workbook is a combination of:
Contact:
 Information with examples
 Self Test Questions – Multiple choice and Exercises e-mail Web
 Answers to Self Test Questions Victoria.stepanova@ru.pwc.com www.accountingreform.ru
Tel. + 7 495- 967-6000 Fax. + 7 495- 967-6001
The members of the project team were contributed by
PricewaterhouseCoopers, ACCA, FBK and Agriconsulting. Moscow, Russia, January 2007 (updated)

1. Introduction and Definitions......................................................................................................................................................................3

Aim...................................................................................................3

Objective.........................................................................................3

Definitions ......................................................................................3
2. Transaction Identification.........................................................................................................................................................................4
3. Sale of Goods...........................................................................................................................................................................................5
4. Provision of Services................................................................................................................................................................................6
5. Interest, Royalties and Dividends.............................................................................................................................................................7
6. Disclosure.................................................................................................................................................................................................9
7. Specific Examples..................................................................................................................................................................................10

Sale Of Goods..............................................................................10

Provision Of Services..................................................................13

Interest, Royalties And Dividends..............................................17

8. Multiple choice Questions......................................................................................................................................................................18
9. Exercise Questions................................................................................................................................................................................20
10. Solutions...............................................................................................................................................................................................21
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 Revenue

Answers to Multiple Choice Questions:....................................21

Answers to Exercise Questions:................................................21

1. Introduction and Definitions

AIM
The aim of this workbook is to assist you to understand Revenue according
to IFRS.

OBJECTIVE
Revenue is the subject of International Accounting Standard 18.
IAS 11, 17, 28, 39 & 41 complement IAS 18..

Revenue is income that is derived from ordinary activities of the firm.

Income comprises revenue and gains.

The timing of recognition of revenue is a key issue of the standard.

Revenue is recognised when it is probable that future economic benefits will

flow to the firm, and the benefits can be measured.

DEFINITIONS

Revenue
Other than increases from contributions by investors, Revenue is the gross
inflow of benefits from ordinary activities, when those inflows result in increases
in equity.

Fair value
Fair value is the value for which an asset could be sold, or a liability
extinguished, between willing, independent traders.

Excluded from revenue are amounts collected on behalf of others, such as

sales taxes, value added tax and money collected on behalf of a principal, in an
agency relationship.

Measurement
Revenue should be measured at the fair value of the consideration received,
or receivable. Trade discounts and volume rebates should be subtracted
from revenue.

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Where extended credit is given, either interest-free or at an interest charge

below market rates, future receipts should be discounted to net present
value.
The rate at which to discount is the higher of the weighted average cost of
capital or the marginal borrowing cost of the company, which ever is greater.
In the following examples, I/B refers to Income Statement and Balance
Sheet
2. Transaction Identification
Example:
Your business is the manufacture and sale of machinery. A machine in
inventory has a value of $800 and is sold for $1000, in exchange for a
promissory note payable in one year from now. The weighted average cost of
capital is 5% and the marginal borrowing cost is 7%.
The present value of Revenue=$934 ($1000 x 1/1.07).

Revenue of $934 is recognised at date of sale and the $66 is recognised as

income spread over the life of the promissory note.

I/B DR CR
Promissory notes B 1000
Revenue I 934
Deferred Interest Receivable B 66
This records the sale of the machine
Cost of Sales I 800
. Inventory B 800
Example:
Cost of machine sold
You exchange corn for two machines. One has a market price of $400. One has
no market price, and you exchange corn worth $375 for this machine. The corn Deferred Interest Receivable B 5.5
exchanged is in inventory, valued at $500. Your revenue = $775, and you have Interest Received I 5.5
new fixed assets worth $775. Monthly transfer - deferred income to revenue,
each month for 12 months
I/B DR CR Cash B 1000
Asset 1 B 400 Promissory notes B 1000
Asset 2 B 375 1 year later -Cash received
Revenue - Corn Sales I 775 If a transaction involves a servicing element of the product sold, the revenue
Cost of corn sales I 500 relating to the service is spread over the period of the service.
Inventory I 500 Example:
Assets exchanged for inventory You sell a car for $5000 and promise to service it twice in 6 months.
The value of each service =$300
Where goods are exchanged, revenue is created. Fair value may be Current revenue = $4400, deferred revenue = $600. The $600 is considered
determined as the value of the goods given up, adjusted for any cash a payment in advance of service, and will be recognised as revenue when
payment or receipt, relating to the transaction. the services occur, or at the end of the 6-month period.

Combined transactions, such as a sale and repurchase agreement, are dealt

with as one transaction.

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3. Sale of Goods Example:

In March, you supply 5 cars at 400 each to your agent. The contract is a
consignment contract and the ownership and risk remains yours.
A sale is recognised when all the following conditions have been satisfied: In July, the agent sells the cars for 600 each, but you do not receive the money
until August. The agent earns commission at 10% on sales.
1. The seller has passed to the buyer the significant risks, and rewards
of ownership of the goods. Revenue is recognised in July, when the cars are sold by the agent.
2. The seller no longer has effective control over the goods, nor I/B DR CR
continuing management involvement normally associated with Consignment inventory-agent B 2.000
ownership. Inventory B 2.000
3. Revenue can be measured reliably. Initial supply- March
4. It is probable that the seller will receive economic benefits from the Cost of sales I 2.000
transaction. Consignment inventory-agent B 2.000
5. Costs related to the transaction can be reliably measured. Accounts receivable B 3.000
Revenue I 3.000
The transfer of legal title normally passes the risks and rewards.
Normal credit risk derived from sales is not a reason to defer revenue Revenue recognition-July
recognition.
I/B DR CR
Retention of significant risks means that the sale will not be recognised. For Example:
Cost of Sales Commission I 300
example: You sell goods
Accounts valued at $200, on credit to a customer
Payable B with a good credit record.
300
Commission earned in July 10% x 3000
1. If the contract allows the goods to be returned and you cannot Recognise $200 as revenue immediately and an account receivable for $200.
reasonably estimate the probability of return, the sale cannot be
recognised until customer acceptance is clear. I/B DR CR
Accounts receivable B 200
2. If installation has not been completed, when the installation is an Revenue I 200
important part of the contract, recognition does not take place until Credit sale
installation is complete.
Where foreign exchange control restricts the transfer of the sales proceeds,
3. If the sale is contingent on the buyer deriving revenue from resale of the recognition cannot take place until permission (to transfer funds) is granted.
goods, recognition is deferred.
Once an amount has been recognised in revenue, any risk of non-payment
4. If the seller provides exceptional cover against unsatisfactory is treated as a bad, or doubtful debt.
performance of the goods (more than is covered by normal warranty
provisions. Where warranties are given to the buyer, the cost of these will be
immediately recognised as an expense.
If these cannot be measured reliably, the proceeds received should be not
be recognised as revenue but as liability until the warranty position is clear.

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 Revenue

Revenue I $5m
Revenue recognition

In theory, if you had no experience of judging warranty costs the whole
$3.000 would be recognised as a liability until the warranty position is clear.
In practice, a manufacturer would estimate the warranty liability and
recognise the sales immediately.
Example:
You sell $3000 of good that cost $2500s. Experience tells you that warranty
costs will be 2% of revenue.
Recognise the revenue of $3000 immediately and create a warranty provision for
$60 ($3000*2%) and recognise the warranty expense immediately in the income
statement.

I/B DR CR
4. Provision of Services Cash B 3.000
Revenue from the provision of services should be recognised by referring to Revenue I 3.000
the stage of completion at the balance sheet date. Sale
Cost of sales I 2.500
The stage of completion, the costs to date, and the costs to complete the
Inventory B 2.500
transaction should be reliably measurable.
Warranty costs I 60
Warranty provision B 60
Example: Warranty provision
You are constructing a building for a client. Project revenue is $20m. Revisions to estimates do not mean that the financial outcome of the
transaction cannot be reliably measured.
Costs to date are $6m, and you estimate that additional costs to completion are
$10m . Advances and progress payments received from clients may not reflect the
stage of completion.
The client has, so far, only approved $4m of the expenditure, as his staff is on
holiday for the month. Example: Percentage of Completion -i
On day 1 of a $50 million contract, $5 million is received on account.
You believe that the $2m ($6-$4m) will be approved). No payment has been This should not be fully recognised as revenue until 10% of the work has been
received. successfully completed.

Recognise: I/B DR CR
$4m as expense (the amount approved) Cash B $5m
$5m as (accrued) revenue (4/16*$20m).
Deferred revenue B $5m
Recording cash receipt on day 1
$2m is left as work in progress. ($6m-$4m=$2m)
I/B DR CR
Cost of sales I $4m Example: Percentage of Completion -ii
10% is now completed, costs total $3m
Work in progress B $4m
Cost of sales I $3m
Accounts receivable B $5m
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 Revenue

Work in progress B $3m Example: Expensing costs

Deferred revenue B $5m Project revenue is a total of $80 million. $5 million has been spent by the period
Revenue I $5m end, and the client has serious financial problems.
Revenue recognition –when 10% of the
Recognise no accrued revenue, and $5 million as (actual) expenses.
work is completed
I/B DR CR
In the early stages of a transaction, it may be that the profitability cannot be
reliably estimated. Cost of sales I $5m
Work in progress B $5m
If it is likely that only the costs will be recovered, recognise only enough Recognising expenses
revenue to equal the costs. (accounting for the project as breakeven: no
profit, no loss). To recapitulate:

Example: Recovery of costs The three options in calculating Revenue, depending on the level of
Project revenue is a total of $100 million. $1 million has been spent at the period knowledge of the transaction’s final outcome are:
end, and there are problems that indicate that no profit will be made on the
project. 1. Anticipating a profit: Percentage of completion method.
2. Anticipating Break-Even: Recovery of costs, only.
Recognise $1million as accrued revenue and $1million as (actual) expenses.
3. Anticipating a loss: Non-recovery of costs (but full expensing of
I/B DR CR costs).
Accounts receivable B $1m
Please also see IAS 11 Construction Contracts workbook.
Revenue I $1m
Revenue recognition
Cost of sales I $1m 5. Interest, Royalties and Dividends
Work in progress B $1m
Recognising expenses Revenue should be recognised as follows:

If it is not probable that the costs will be recovered, no revenue is Interest should be recognised on a time-proportion basis, reflecting the
recognised, and all costs are immediately expensed. effective yield of the asset. (The effective yield takes account any fees,
discount, or premium, at which the financial instrument was issued.)

Example:
You make a loan of $500m at 12% interest for a year. Interest is only paid at the
end of the period.

Accrue interest receivable of $5m each month.

I/B DR CR
Accounts receivable B $5m
Interest receivable I $5m
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Revenue recognition each month

Effective Interest Rate
Example: Both the nominal and effective interest rates, by definition, are
You make a $20.000 loan at 10% for 2 years. Interest is applied annually and paid to yield the same amount of interest.
at the end of each year. Your administration fee is $400 and paid in advance.
Nominal rate: Invest $1 at 9.65% compounded quarterly.
The administration fee is treated as deferred revenue $400 and will be recognised At the end of one year:
over the 2 year loan period.
Cash inflows from this loan are:
Year 0 +400 = $1.10
1 +2000
2 +2000 Effective rate therefore is 10%
Total 4400 or 2200 per year.
Effective rate: Invest $1 at i% pa. You receive interest only once!
So the effective interest rate (produces the same amount of cash flow is 11%.
Therefore: = $1.10
So 11.00% of 20,000 i.e $2200 will be recognised as income in each year.
So a nominal rate of 9.35% quarterly has an effective rate of 10%
Year 1 beginning I/B DR CR
i.e you receive with the same amount of interest.
Loan receivable B 20.000
Cash B 20.000
Cash B 400 Royalties should be recognised on an accruals basis, based on the relevant
Deferred revenue fees B 400 contract.
Providing loan and receiving fee
Example:
You sell the US rights to your book at $1 per book.
Annually I/B DR CR Payment is to be made every six months in arrears.
Accrued Interest receivable B 2000
Deferred revenue fees B 200 In month 1, 400.000 copies are sold in the US.
In month 2, 1 million copies are sold.
Interest income I 2000
Fee income I 200
Accrue royalty income of $400.000 for month 1 and $1million for month 2.
Accruing interest and recognising
fees at the end of year 1
I/B DR CR
Accounts receivable B $400.000
Revenue I $400.000
Revenue recognition-month 1
Accounts receivable B $1m
Revenue I $1m
Revenue recognition-month 2

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Dividends should be recognised only when the shareholder has a legal right
to receive payment. Example:
You buy a bond for $105 on April 1. It has a face value of $100. It pays interest of
Example: 20% every December 31st. The price you paid therefore includes 3 months of
You have purchased a preferred share. It will pay 3% dividend each quarter, 4 accrued interest. (The $105 includes $5 accrued interest.)
weeks after the board declares the dividend.
Even though you have only owned it for 9 months, you will receive the full 20%
Accrue the dividend receivable when the board declares the dividend each interest on December 31st.
quarter.
When you receive the interest, it will be spilt between pre-acquisition ($5) and
If the directors declared their intention to declare a dividend no accrual would be post-acquisition periods ($15). The pre-acquisition portion ($5) is deducted from
made as no legal rights arise from an intention. the cost of the financial instruments.
I/B DR CR
Accounts receivable B $3 I/B DR CR
Dividend receivable I $3 Investment B 100
Revenue recognition-following declaration Accrued interest on bonds B 5
of dividend Cash B 105
Purchase of bond
If the board does not declare a dividend, none must be accrued for this Cash B 20
share. Accrued interest on bonds B 5
Interest received I 15
Where unpaid interest, or dividends, had accrued before the acquisition of a
financial instrument, the next receipt of interest, or dividend, will be spilt Receipt of interest
between pre-acquisition and post-acquisition periods. The pre-acquisition
portion is deducted from the cost of the financial instrument. Only the post- Only the post-acquisition portion is recognised as revenue ($15). Next year,
acquisition portion is recognised as revenue. the whole $20 will be recognised as interest received.

6. Disclosure
Disclosure includes

Accounting policies used for revenue recognition, including methods of

determining the stage of completion of transactions for services.

Revenue should be split, to show separately, revenue arising from:

1. Sale of goods.
2. Provision of services.
3. Interest.
4. Royalties.
5. Dividends.
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 Revenue

Where the contract specifies delivery, installation and inspection, all must be
1. Revenue from the exchange of goods, or services, should be identified in completed to recognise revenue.
each category. Exceptionally revenue may be recognised on delivery, if installation and
2. Any contingent liabilities, or assets, such as warranty claims should be inspection are short and straightforward.
identified in each category.
Example:
You sell domestic refrigerators to a retail chain.
7. Specific Examples They must be inspected prior to acceptance, but the inspector is ill.
None have been rejected in the last 2 years.
SALE OF GOODS
Revenue can be recognised immediately.
1. “Bill and Hold”
3. On approval, with a limited right of return.
Buyer takes title but delivery is delayed.
Revenue is recognised upon the buyer’s acceptance, or the time for rejection
The seller recognises Revenue when the buyer takes title, if: has passed.
1. delivery will be made
2. the product is identified and ready for delivery Example:
3. delayed delivery is agreed You sell curtains to a retailer.
4. usual payment terms apply. Written notification of rejection must be made within 10 days.

Example: At the end of 10 days, if none have been rejected, revenue can be
You are about to deliver your monthly consignment of goods, when your client’s recognised.
warehouse burns down. He asks you to store them, at his risk, until he can find
alternative storage. 4. Consignment sales and sales using agents.

The title to the good and risk has passed to the customer. Revenue is recognised The agent resells the goods before paying the seller. Revenue is recognised
immediately. when the goods are resold.

I/B DR CR Example:
Inventory B 100 In April, you supply 5 cars to your agent. The contract is a consignment contract.
Inventory – held on behalf of customer I 100 In July, the agent sells the cars, but you do not receive the money until
September.
Transfer of ownershiip
I/B DR CR
Consignment inventory-agent B 500
I/B DR CR
Inventory B 500
Accounts receivable B 100
Initial supply- April
Revenue I 100
Cost of sales I 500
Revenue recognition
Consignment inventory-agent B 500
Accounts receivable B 1.000
2. Installation and inspection.
Revenue I 1.000
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Revenue recognition-July
Example:
Revenue is recognised in July, when the cars are sold by the agent. You are building a house costing $60,000. You accept deposits and progress
5. Cash-on-delivery sales. payments, prior to the house being finished. When it is finished, 10% of the total
price of $100.000 remains unpaid, but you anticipate receipt in the next few days.
Revenue recognition occurs when delivery is complete and cash has been
paid. If the work is complete, revenue may be recognised.
I/B DR CR
Example: Cost of sales I 60.000
You sell books via the Internet. Clients can pay on receipt of the books. Work in progress B 60.000
Accounts receivable B 10.000
When your agent has received the cash, having delivered the goods, the revenue Client deposits B 90.000
can be recognised.
Revenue I 100.000
I/B DR CR
Revenue recognition on building
Cost of sales I 500 completion
Inventory B 500 7. Payments in advance of manufacture.
Accounts receivable B 1.000
Deferred Income B 1.000 Example:
Recording delivery of books to client A foreign buyer pays for your goods at the start of each month. They are shipped
Cash B 1.000 in the middle of the month, and he accepts delivery at the end of each month.
Accounts receivable I 1.000 Recognise revenue when the goods are accepted.
Deferred Income B 1.000 I/B DR CR
Revenue B 1.000 Cash B 100
Revenue recognition on receipt of cash Deferred Income - Payments in advance B 100
Cash received at start of month
6. Payment by instalments followed by delivery. Goods Shipped B 80
Inventory B 80
Recognition of revenue is on delivery. If experience shows that most clients Shipment made- mid month
pay all of their instalments, revenue recognition may take place when most Deferred Income - Payments in advance B 100
of the payments have been made, and the goods are ready for delivery. Revenue I 100
Cost of Sales I 80
Goods Shipped B 80
Revenue recognition on acceptance of
goods

8. Sales and repurchases of the same items, which are really financing
transactions.

Treat as a financing transaction, rather than recognise revenue.

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Example: Interest portion is recognised as interest earned, using the imputed rate of
You sell a portfolio of shares in March for $5.000, with a contract to repurchase interest. The sale price is the present value of the payments (net of interest).
them for $5.250 in September (6 months). The instalments are discounted by the imputed rate of interest.

This is primarily a finance transaction, and no revenue should be recognised. Example:

You sell a car, costing $8000, for $10.000, payable in instalments over one year.
Monthly, an interest accrual of 250/6 would be made. The rate of interest is 10%. Interest is included in the price.
I/B DR CR
Cash B 5000 Recognise immediately revenue of $9.091(10000/110%) and interest receivable of
Investment B 5000 $909, matched by an accounts receivable of $10.000.
Cash received, investment ‘sold’ The interest receivable of 909 would be recognised monthly over the year in which
it is received.
Borrowing cost I 250
I/B DR CR
Investment B 5000
Cost of sales I 8.000
Cash B 5250
Inventory B 8.000
Investment repurchased
Accounts receivable B 10.000
Interest receivable I 909
Revenue I 9.091
9. Subscriptions to publications.
Recording sale and interest charge
11. Real estate sales.
Recognise revenue on a straight-line basis over time.
If the product price varies, use the percentage completion method, by value.
Normally, revenue is recognised when title is transferred.
Review the contract, and national law, to see if the seller has further
Example:
substantial obligations to perform to complete the sale.
You sell a 3-year subscription to your monthly magazine.
Example:
Recognise the revenue by as 1/36 of the revenue when each month’s magazine is
You sell a house, but have committed your firm to repair the roof. Your roofer is
issued.
away for 2 months.
I/B DR CR
Cash B 36 Defer recognition of the sale until the roof is repaired.
Deferred revenue B 36 I/B DR CR
Cash received Cost of sales I 90.000
Deferred revenue B 1 Inventory B 90.000
Revenue I 1 Cash B 100.000
Revenue recognition on magazine issue Sales suspense B 100.000
Recording conditional sale of house
If the price rises each year, then split the subscription to match the different
Sales suspense B 100.000
price levels of each year.
Revenue I 100.000
10. Instalment sales. Revenue recognition on repair of roof

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PROVISION OF SERVICES Example:

In July, as an agent, you book for a client, an advertisement to appear in both the
12. Installation fees. November and December issues of a magazine. Your commission is $500.
Recognise $250 each time the advertisement appears.
Recognised by the stage of completion. I/B DR CR
Cash (or accounts receivable) B 500
Example: Deferred revenue B 500
You are installing a computer network in 5 identical buildings for a client, Record of booking
under a single contract.
Deferred revenue B 250
Recognise 20% of revenue on completion of installation in each building. Revenue I 250
Transfer each time advertisement appears
13. Service fees / after sales support included in the price of the
product. 15. Insurance agency commissions.

Recognised over the period of the services / support. Recognition when received, or receivable. Deferred and recognised over the
life of the policy, if further services are required.

Example:
You sell a car for $15.000, including a year’s warranty. Example:
The fair value of the warranty is $1.200. A client signs two insurance policies, which will give your firm a commission of
Under the terms of the warranty the car will be brought to you for quarterly policy (1) $100 and policy (2) $120.
servicing. For policy (1) all payments are made immediately and for policy (2) payments will
be made monthly over 1 year.
Recognise $13.800 as revenue for the sale immediately, and $300 as service
revenue when the car has each service. The payments for policy (2) will be collected at the client’s home each month.
Debit: Cash $15.000. The commission element of each collection will be $10.
Credit: Revenue $ 13.800, Deferred revenue $1.200 Recognise commission of $100 now, and $10 each time payment is collected.
I/B DR CR I/B DR CR
Cash B 15.000 Accounts receivable B 220
Warranty provision B 1.200 Deferred revenue commission B 120
Revenue I 13.800 Revenue commission I 100
Initial sale Signing of the policy
Warranty provision B 300 Deferred revenue B 10
Revenue I 300 Revenue I 10
Transfer when each service is provided Cash B 10
Accounts receivable B 10
14. Advertising commissions. Transfer when each payment is collected

Recognised when the specific advertisement appears. 16. Financial service fees- Integral part of the effective yield.

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Origination fees relating to initiating a loan, such as credit checking and loan I/B DR CR
documentation, should be deferred and recognised as an adjustment to the Accounts receivable B 83
effective yield. In each period, they are recognised as fees. Deferred revenue B 30
Example: Interest receivable I 83
You provide a $10000 loan at 10% for 2 years. Interest is paid at the end of each
Fee income I 30
year. Your administration fee is $200 and paid in advance.
Accruing interest and recognising fees
I/B DR CR
Loan receivable B 10.000
The effective yield of the loan is 13.6%.
Cash B 10.000 (Interest of $1.000+ $360 fees) / $10.000 loan = 13.6%.
Cash B 200
Deferred revenue B 200 If the loan had never been drawn down, recognise the fees at the end of year
Providing loan and receiving fee 2.
Accrue interest monthly, and recognise the fees monthly ($100 each year).
I/B DR CR 17. Financial service fees - Fees for servicing a loan.
Accounts receivable B 83
Deferred revenue B 8 Fees to be recognised when the services are provided.
Interest receivable I 83
Fee income I 8
Accruing interest and recognising fees
The effective yield of the loan is 11%.
(Interest of $2000+ $200 fees) / $10000 loan = 11% p.a.

Commitment fees are considered to be fees for the ongoing involvement.

They should be deferred and recognised as an adjustment to the effective
yield. Recognition will occur at the expiry of the commitment, if the loan is not
drawn down.

Example:
You offer a $10.000 loan facility at 10% for 2 years. Interest is paid at the end of
each year. Your commitment fee is $360 and paid in advance. The loan is drawn
down on the 1st day of year 2.
I/B DR CR
Cash B 360
Deferred revenue B 360
Loan receivable B 10.000
Cash B 10.000
Receiving fee (day 1) and providing loan
(1st day of year 2)
Accrue interest monthly in year 2, and recognise $30 each month (fees) in
year 2.
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Each year, you record $5 million as interest receivable, and $1 million as

Example: syndication fees.
You provide a loan for 1 year. You have a service fee of $4.000, payable in Cash B $6 m
advance. Each quarter, you will audit your client’s accounts, and review the Interest receivable I $5 m
results, to confirm that there has been no breach of the covenant contained in the Fees-syndication I $1 m
loan contract. Each receipt of interest & fees
I/B DR CR
Cash B 4.000 19. Admission fees.
Deferred revenue B 4.000
Loan receivable B 100.000 Recognition occurs when the event takes place.
Cash B 100.000
Accruing interest and recognising fees Example:
In May, you sell tickets for a concert that will take place in July:
Recognise $1.000 of fee income on completion of each review. I/B DR CR
Deferred revenue B 1.000 Cash B 100
Revenue I 1.000 Deferred revenue B 100
Transfer following each review
Revenue will be recognised after the concert in July:
18. Financial service fees – Fees earned for a specific act. I/B DR CR
Deferred revenue B 100
Examples are commissions on the allotment of shares, placement fees Revenue I 100
relating to loans and loan syndication fees.
20. Initiation, entrance and membership fees.
Revenue is recognised on completion, assuming involvement then ceases. If
part of the loan is retained, with a higher effective yield, the additional yield is Recognition reflects the timing of the services provided.
the syndication fee, which should be recognised, when the syndication is
completed. Example:
To become a student member of an accounting body, you have to pay $165
Example: registration fee and $180 annual membership.
You organise a syndicated loan for $1.000m. You provide 10% of the funds. You
receive 6% interest, while the other syndicate members receive only 5%. The $165 can be recognised as the accounting body’s revenue when you are
registered:
I/B DR CR
Loan receivable B $100 m I/B DR CR
Cash B $100 m Cash B 345
Provision of loans Revenue I 165
Deferred revenue B 180

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The membership fee will be recognised at the rate of $15 per month:
I/B DR CR Example:
Deferred revenue B 15 You run a fast-food franchise business.
Revenue I 15 You charge an annual franchise fee of $20.000, payable at the start of the year.
You also charge a monthly fee of $1.500 for which you provide a fixed amount of
21. Franchise fees – Supplies of equipment and other tangible assets. food with a value of $1.800 each month, including your standard profit margin of
$300. Any additional food is charged separately.
Recognition occurs when the items are delivered, or title passes.
Recognise only $16400 ($20000-($300*12)=$16400) as fee income at the start of
Example: the year. Consider the remainder as a payment in advance of the monthly fee,
As part of the contract, your fast-food franchisee must buy cooking equipment and therefore recognise $1.800 per month.
from you costing $15.000. Title passes when the equipment has been installed,
and has been inspected by the local authorities. I/B DR CR
I/B DR CR Cash B $20.000
Cash B $15.000 Revenue I $16.400
Deferred revenue B $15.000 Deferred revenue B $3.600
Recording the receipt of cash for the cooking equipment. Recording receipt of the annual franchise fee.
Recognise the sale when the inspection has been satisfactorily completed: I/B DR CR
I/B DR CR Cash B 1.500
Deferred revenue B $15.000 Revenue I 1.800
Revenue I $15.000 Deferred revenue B 300
Accounting monthly for the food
22. Franchise fees – Initial and subsequent services.
23. Franchise fees – Continuing.
Recognition reflects the timing of the services provided.
Recognition reflects the timing of the services provided, or the passage of
Where subsequent fees do not cover the cost of ongoing services, part of the time, depending on the franchisor’s commitment.
initial fee should be deferred and recognised when subsequent services
have been provided. Example:
You run a car dealer franchise network.
$10.000 of the franchise fee, that you charge your franchisees, is for the training
of 20 staff of your franchisee:

I/B DR CR
Cash B 10.000
Deferred revenue – training B 10.000

16
 Revenue

Receipt of Franchise Fee

I/B DR CR The payment of $6000 has no impact on the revenue recognised. Such
Revenue I 500 payments improve cash flow.
Deferred revenue-training B 500
Each time one is trained, credit $500 to INTEREST, ROYALTIES AND DIVIDENDS
fees
26. Licence fees and royalties.
24. Franchise fees – Agency Transactions.
Recognition is based on the substance of the contract. In general, they will
If the franchisor orders supplies for the franchisee at no profit, no revenue, be spread, on a straight-line basis, over the life of the project.
nor cost, is recognised.
If rights are sold for an unlimited time, without further service involved, then
Example: this can be treated as a sale.
You run a fast-food franchise business.
You insist that your franchisees have a health and safety audit each year, Examples:
organised by you, recharged at cost. You sell the rights to your drug to the Ukraine for $10 million for 5 years.
I/B DR CR Recognise $2 million per year.
I/B DR CR
Cash B 50
Audit costs I 50 Cash B 10million
Accounts receivable franchisee B 50 Revenue I 2million
Deferred revenue B 8million
Audit costs I 50
Receipt of cash and recognition of the
Show this as a recharge, rather than revenue.
revenue from year 1.
25. Fees from customised software development.
You sell the rights to your drug in the US for $50 million, for an unlimited
Recognition is based on the percentage completion method. amount of time, but subject to your help in successfully obtaining the
Provision should be made for after-sales service. approval of the Federal Drug Agency (FDA) for the drug.

Recognise the $50million as a sale only when the drug receives FDA
Example:
approval.
You have a contract worth $25000 to produce software.
$5000 of this sum is allocated to after-sales support.
40% of the development has been completed.
The client has paid $6000 so far, and will pay the remainder on completion.

Recognise 40%($25000-$5000) = $8000 of revenue. The $5000 for after sales

support will be amortised over the period to which it relates.

I/B DR CR
Cash B 6.000
Revenue I 8.000
Accounts receivable B 2.000
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8. Multiple choice Questions
Choose the answer closest to that you believe to be correct.
1. Revenue:
1) Includes gains.
2) Is the gross inflow of economic benefits of the ordinary activities,
when those inflows result in increases in equity, other than increases
relating to contributions from investors.
3) Includes sales taxes and value added tax.
2. Fair Value
1) Is the value for which an asset could be sold, or a liability
extinguished, between willing, independent traders.
2) Is the value agreed between related parties.
3) Is based on historical cost.
3. Trade discounts and volume rebates should:
1) Be ignored.
2) Be subtracted from revenue.
3) Be shown in the balance sheet under equity.
4. Where interest-free, long-term credit is given,
1) Revenue should not be recognised until cash is received.
2) Future receipts should be discounted to net present value.
3) A bad debt provision should be created.
5. Where goods are exchanged:
1) No bookkeeping is necessary.
2) Cash is never involved.
3) Revenue is created.
6. A Transaction involves after sales service:
1) It is no longer regarded as revenue.
Revenue
2) The revenue relating to the service is spread over the period of the
service.
3) It is always a credit transaction.
7. Combined transactions, such as a sale and repurchase agreement:
1) Are dealt with as one transaction.
2) Must be shown separately.
3) Are illegal.
8. When is a sale recognised?
1) Whenever the seller decides to recognise it.
2) At the end of each accounting period.
3) When certain conditions have been satisfied.
9. Normal credit risk derived from sales is:
1) The best reason to defer revenue recognition.
2) Not a reason to defer revenue recognition.
3) Detailed in the audit report.
10. Retention of significant risks means that:
1) The sale will not be recognised.
2) There is no problem with revenue recognition.
3) Insurance is mandatory.
11. If the sale is contingent on the buyer deriving revenue from resale
of the goods:
1) It should never be recognised as a sale.
2) It should receive shareholder approval.
3) Recognition is deferred.
12. Where foreign exchange control jeopardises the transfer of the
sales proceeds:
1) Recognition cannot take place until permission to transfer funds is
granted.
2) The sale is cancelled.
3) A bad debt provision should be created.
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 Revenue

13. Once an amount has been recognised in revenue, any risk of non- 19. If the costs will probably be recovered, recognise:
payment is treated as:
1) All revenue.
1) A reduction in revenue 2) Only that amount of revenue, equal to the costs.
2) A bad, or doubtful debt expense. 3) No revenue.
3) A charge to accounts payable.
20. Interest revenue should be recognised on a:
14. Where warranties are given to the buyer, the cost of these will be
recognised: 1) Time-proportion basis, reflecting the effective yield of the asset.
2) Cash basis.
1) As an expense. 3) Time-proportion basis, reflecting collection periods.
2) As a reduction in revenue.
3) In the following period. 21. Royalties should be recognised on:

15. Revenue from the provision of services should be recognised by 1) A cash basis.
referring to the: 2) An accruals basis.
1) Original estimates.
3) An actual basis.
2) Payments received in advance.
3) Stage of completion at the balance sheet date. 22. Dividends should be recognised:

16. The stage of completion, the costs to date, and the costs to 1) On a cash basis.
complete the transaction should be: 2) On an accruals basis.
3) When the shareholder has a legal right to receive payment.
1) Ignored.
2) Listed in the accounts.
3) Reliably measurable.

17. Revisions to estimates:

1) Mean that the financial outcome of the transaction cannot be reliably

measured.
2) Mean that the financial outcome of the transaction can be reliably
measured.
3) Cancel the transaction.

18. Advances and progress payments received from clients:

1) Is proof of the stage of completion.

2) May not reflect the stage of completion.
3) Should be booked to accounts payable.
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9. Exercise Questions
Decide when, and how much, revenue can be recognised in each of the
following situations.
Provide debits and credits for your answer, where revenue is
recognized.
1. You are about to deliver your monthly consignment of goods, when your
client’s delivery service ceases business. He asks you to store them, at his
risk, until he can find alternative transport.
2. You sell carpets to a retail chain.
They must be inspected prior to acceptance, but the inspector is ill. None
have been rejected in the last 3 years.
3. You sell radiators to a wholesaler. Written notification of rejection must be
made within 30 days.
4. In April, you supply 40 computers to your agent. The contract is a
consignment contract. In November, the agent sells the computers, but you
do not receive the money until December.
5. You sell software via the Internet. Clients can pay on receipt of the
software.
6. You build warehouses. You accept deposits and progress payments, prior
to the warehouse being finished. When it is finished, 2% of the total payment
remains unpaid, but is likely to be paid soon.
7. A buyer pays for your goods on the 5th of each month. They are shipped
on the 10th of the month, and he accepts delivery on the 15th of each month.
8. You sell a portfolio of shares in January for $10.000, with a contract to
repurchase them for $10.500 in March.
9. You sell a 5-year subscription to your hardware support service, payable
in advance.
10. You sell a machine for $100.000, payable in instalments over one year.
The rate of interest is 10%. Interest is included in the price.
Revenue
11. You sell a hotel, but have committed your firm to repair the drains. Your
repairer is away for 2 months.
12. You are installing a telephone network in 20 identical buildings for a
client, under a single contract.
13. You sell a photocopier for $30.000, including a year’s warranty. The fair
value of the warranty is $2.400. The copier will require quarterly services.
14. In July, as an agent, you book a band to appear once in March and once
in May at a dance hall. Your commission is $4.000.
15. A client signs an insurance policy, which will give your firm a commission
of $5.000. Payments will be made monthly over 2 years. The payments will
be collected at the client’s home. The commission element of each collection
will be $100.
16. You provide a $100.000 loan at 12% for 3 years. Interest is paid at the
end of each year. Your administration fee is $3.600 and paid in advance.
17. You offer a $100.000 loan facility at 15% for 4 years. Interest is paid at
the end of each year. Your commitment fee is $4.800 and paid in advance.
The loan is drawn down on the 1st day of year 3.
18. You provide a loan for 4 years. You have a service fee of $32.000,
payable in advance. Each quarter, you will audit your client’s accounts, and
review the results, to confirm that there has been no breach of covenant (the
loan contract).
19. You organise a syndicated loan for $2.000 million. You provide 5% of the
funds. You receive 8% interest, while the other syndicate members receive
only 6%.
20. In October, you sell tickets for an exhibition that will take place in
December.
21. To become a member of a car club, you have to pay $100 registration
fee and $600 annual membership. How does the car club recognise its
revenue?
20
 Revenue

22. As part of the contract, your car service franchisee must buy equipment 9. 2) 18. 2)
for the service bays from you. Title passes when the equipment has been
installed, and has been inspected by the local authorities. ANSWERS TO EXERCISE QUESTIONS:

23. You charge an annual franchise fee of $80.000, payable at the start of
the year. You also charge a monthly fee of $6.000. You provide a fixed
amount of supplies with a value of $7.200 each month, including your
standard profit margin of $1.200. Any additional supplies are charged
separately.
1. Revenue can be recognised immediately.
Debit: Account receivable. Credit: Revenue.
2. Revenue can be recognised immediately.
Debit: Account receivable. Credit: Revenue.

24. $30.000 of your franchise fee is for the training of 60 staff of your
franchisee.
25. You insist that your franchisees have a financial and operational internal
audit each year, organised by you, recharged at cost.
26. You have a contract worth $50.000 to produce software.
$10.000 of this sum is allocated to after-sales support.
20% of the development has been completed. The client has paid $18.000
so far, and will pay the remainder on completion.
27. You sell the rights to your trademark to the Georgia for
$70 million for 10 years.
28. You sell the rights to your drug in the US and Europe for $100 million, for
an unlimited amount of time, but subject to your help in successfully
obtaining the approval of the Federal Drug Agency (FDA) for the drug.
3. At the end of 30 days, if none have been rejected, revenue can be
recognised.
Debit: Account receivable. Credit: Revenue. (after 30 days)
4. Revenue is recognised in November, when the computers are sold by the
agent.
Debit: Account receivable. Credit: Revenue. (in November).
5. When your agent has received the cash, having delivered the software,
the revenue can be recognised.
Debit: Cash. Credit: Revenue.
6. If the work is complete, revenue may be recognised.
Debit: Account receivable, deferred revenue. Credit: Revenue.
7. Recognise revenue when the goods are accepted.
Debit: Deferred revenue. Credit: Revenue.

8. This is primarily a finance transaction, and no revenue should be

recognised.
10. Solutions
9. Divide the revenue by 60, and recognise 1/60 of the revenue each month.
ANSWERS TO MULTIPLE CHOICE QUESTIONS: Debit: Cash. Credit: Deferred revenue. (on day 1)
Debit deferred revenue. Credit Revenue. (monthly)
1. 2) 10. 1) 19. 2)
2. 1) 11. 3) 20. 1) 10. Recognise immediately revenue of $90.909 (100.000/110%) and interest
3. 2) 12. 1) 21. 2) receivable of $9.091, matched by an accounts receivable of $100.000.
4. 2) 13. 2) 22. 3) Debit: Accounts receivable $100.000.
5. 3) 14. 1) Credit: Revenue $90.909, Interest receivable $9.091.
6. 2) 15. 3)
7. 1) 16. 3) 11. Defer recognition of the sale until the drains are repaired.
8. 3) 17. 2) Debit: Cash. Credit: Deferred revenue.
21

12. Recognise 5% of revenue on completion of installation in each building.
Debit: Account receivable. Credit: Revenue. ( for each installation)
13. Recognise $27.600 as revenue for the sale immediately, and $600 as
service revenue when the photocopier has each service.
Debit: Cash $30.000. Credit: Revenue $27.600, Deferred revenue $2.400.
14. Recognise $2.000 each time the band appears.
Debit: Account receivable $2.000. Credit: Deferred revenue $2.000 each
time.
15. Recognise commission of $2.600 now, and $100 each time payment is
collected.
Debit: Account receivable $5.000.
Credit: Revenue $2.600, Deferred revenue $2.400.
16. Accrue interest monthly, and recognise the fees monthly ($100 each
month).
Debit: Loan receivable $100.000, Cash $3.600.
Credit: Cash $100.000, Deferred revenue $3.600. (on day 1)
Debit: Account receivable $1.000, deferred revenue $100.
Credit: Interest receivable $1.000, fee income $100. (monthly).
17. Accrue interest monthly in years 3 and 4, and recognise $200 of fees
each month in years 3 and 4.
Debit Account receivable $4.800 Credit: Deferred revenue $4.800. (on day1)
Debit: Loan receivable $100.000. Credit: Cash $100.000. (on drawdown)
Debit: Account receivable $1.250, deferred revenue $200.
Credit: Interest receivable $1.250, fee income $200. (monthly after
drawdown)
18. Recognise $2.000 of fee income on completion of each review.
Debit: Cash $32.000. Credit: Deferred revenue $32.000. (on day1)
Debit: Deferred revenue $2.000. Credit: Fee Income $2.000. (after review)
Revenue
19. Each year, you record $6 million as interest receivable, and $2 million as
syndication fees.
Debit: Loan receivable $100 million. Credit: Cash $100 million. (on day1)
Debit: Cash $8 million.
Credit: Interest receivable $6 million, fees $2 million.
(when interest is received)
20. Revenue will be recognised after the exhibition in December.
Debit: Cash. Credit: Deferred revenue (in October).
21. The $100 can be recognised as the car club’s revenue when you are
registered. The membership fee will be recognised at the rate of $50 per
month.
Debit: Cash $700. Credit: Revenue $100, Deferred revenue $600.
22. Recognise the sale when the inspection has been satisfactorily
completed.
Debit: Account receivable. Credit: Deferred revenue. (on day1)
Debit: Deferred revenue. Credit: Revenue. (after inspection).
23. Recognise only $65.600 ($80.000-($1200*12)=$65.600) as fee income at
the start of the year.
Consider the remainder as a payment in advance of the monthly fee, and
recognise it at the rate of $1.200 per month to add to the monthly fee.
Debit: Cash $80.000.
Credit: Revenue $65.600, Deferred revenue. $14.400. (on day1)
Debit: Deferred revenue $1.200. Credit: Revenue $1.200. (monthly).
24. Each time one is trained, credit $500 to fees.
Debit: Deferred revenue $500. Credit: Revenue $500.
25. Show this as a recharge, rather than revenue.
Debit: Accounts receivable. Credit: Recharges-internal audit fees.
26. Recognise 20%($50.000-$10.000) = $8.000 of revenue.
Debit: Cash $18.000.
Credit: Revenue $8.000, Deferred revenue. $10.000.
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 Revenue

27. Recognise $7million per year. 28. Recognise the $100 million as a sale only when the drug receives FDA
Debit: Cash $70 million.
approval.
Credit: Revenue $7 million, Deferred revenue. $63 million. (Year 1)
Debit: Accounts receivable $100 million.
Credit: Deferred revenue. $100 million

23
 “PricewaterhouseCoopers” and ACCA, FBK and Agriconsulting and can in no
way be taken to reflect the views of the European Union.

This publication has been produced with the assistance of the European Union.
The contents of this publication are the sole responsibility of ZAO