Revenue Recognition

Revenue is one of the key data when we analyze one company. Big company with higher revenue usually produce higher profit than small company (not necessary). A company can only increase its profit  by two means, which are increase revenue or  increase profit margin. It is similar if a person want to increase its saving, either by increase his income or decrease his expense.
 

Since revenue is such an important data in financial statement, then the way company quantifies its revenue is also very important. Many scandals of company arise from boosting the revenue.

There is a few criteria for revenue recognition according to IFRS:
For company that selling products

1. Risk and Rewards of the product have been transferred to customers. In simple word, if the product break down now, company does not have the responsibility to compensate the customers.(warranty is another issue)
2. Company does not have continuing managerial involvement or control on the product. In simple word,  customer has totally freedom and power on how to use the product.
3. The amount of revenue can be quantify reliably. Since the revenue is recorded as number in financial statement, the value of revenue should be measurable.
4. The money from selling the product can probably received by company from customers.(not necessary immediately)
5. The cost incurred can be measured reliably.

For company that providing services

1. The amount of revenue can be quantify reliably. Since the revenue is recorded as number in financial statement, the value of revenue should be measurable.
2. The stage of completion can be measured reliably.
3. The money from selling the product can probably received by company from customers.(not necessary immediately)
4. The cost incurred can be measured reliably.

Below are several special cases
Special Case One:  Long Term Contract
Long Term Contract is contract which is more than one year . There are basically 2 methods to recognise revenue for long term contract.
a) Percentage of Completion Method
Revenue will be recognised on how much percentage of the project that have been completed in current year. For example, the total revenue for whole project is RM10m. This year complete 20% which means revenue for this year is RM2m
b)  Completed Contract Method
Revenue will be recognised only when the whole contract is completed. No revenue will be recognised in previous year for that contract.

Special Case Two: Installment Sales
Installment Sales means customer will not pay full money when buy the product. Instead, customer will pay the money separately each month after the buying with or without charging of interest. Under IFRS, revenue for selling the product according to the product price will be recognised at the date when selling the product whereas interest will be recognised  each month when installment is paid.
 

Special Case Three: Barter
Barter means exchange of goods. If company sell a product to a customer and at the same time receives goods and services with same value from the customer, no cash will be involved in system barter, should  this transaction be included as revenue?
Under IFRS, barter transaction can be measured based on fair value of similar non-barter transaction with other party. For example, company exchanges an apple with an orange with customer A, company sells an apple for RM1 for customer B, so the apple exchange with customer A  will be included in revenue with value of RM1.

Special Case Four: Agent Selling
If a company buys  a product from supplier and directly sell it to the customers , how should the revenue of the company be recognised?  There are two different methods to recognise the revenue.
a) Gross Reporting
Gross Reporting means company report the total of selling price of the product as revenue.
There is a few criteria for revenue to recognise based on gross reporting.

1. Company bear the inventory risk and credit risk. In simple word, if the product break down during the storing process or customer do not pay the money, company itself have to pay the bill.
2. Company can choose supplier.
3. Company can fix the product price.

If the above 3 criteria are not met, revenue will be recorded based on net reporting.
b) Net Reporting
Revenue is reported as the difference between product selling price and cost that incurred (profit).