Revenue: formula sheet

Key formulas

Core principle

Revenue is recognised when (or as) control of a promised good or service transfers to the customer

The amount is the consideration the entity expects to be entitled to.

The five steps

1 Identify the contract → 2 Identify performance obligations → 3 Determine transaction price → 4 Allocate price → 5 Recognise revenue when (or as) each obligation is satisfied

Write these as headings in written answers.

Contract criteria (Step 1)

Approved and parties committed; rights identifiable; payment terms identifiable; commercial substance; collection probable

If these are not met, receipts are generally recognised as a liability, not revenue.

Allocation by relative stand-alone selling price

Allocated price = Stand-alone selling price of obligation ÷ Total of stand-alone selling prices × Transaction price

Use this when a bundle is sold at a discount to the sum of stand-alone prices.

Over time criteria (Step 5)

Over time if: customer receives and consumes benefits as you perform; OR your work creates or enhances an asset the customer controls; OR the asset has no alternative use to you and you have an enforceable right to payment for work done to date

If none are met, revenue is recognised at a point in time.

Contract existence criteria (IFRS 15)

Approved and committed + rights identifiable + payment terms identifiable + commercial substance + collection probable

All five must be met. If one fails, the contract is not accounted for under the five-step model.

Distinct goods or services

Capable of being distinct AND distinct within the context of the contract

Both tests are needed. Capable means the customer can benefit from it alone or with readily available resources.

Indicators that a promise is not separately identifiable

Significant integration service, significant modification or customisation, or high interdependence

Any of these points to combining the items into a single performance obligation.

Series of distinct goods or services

Substantially the same + same pattern of transfer to the customer = one performance obligation

For example, a year of daily cleaning or monthly payroll processing.

Contract modification as a separate contract

Added distinct goods or services + price rises by their stand-alone selling prices (adjusted for the circumstances)

If both conditions hold, treat the modification as a new separate contract.

Transaction price

Transaction price = fixed consideration + constrained variable consideration ± financing adjustment − consideration payable to customer

Exclude amounts collected for third parties, such as sales tax.

Expected value

Expected value = Σ (amount × probability)

Use when there are many possible outcomes or many similar contracts.

Most likely amount

Most likely amount = single outcome with the highest probability

Use when the contract has only two possible outcomes.

Allocation to a performance obligation

Allocated price = (SSP of the obligation ÷ total SSP of all obligations) × transaction price

Applies to a bundle discount unless it clearly relates to only some obligations.

Significant financing component

Revenue = present value of the payment = payment ÷ (1 + r)ⁿ

Unwind the discount as interest over the financing period. Not required if the gap is one year or less.

Variable consideration constraint

Include only if a significant reversal of cumulative revenue is highly probable not to occur

Reassess the estimate at each reporting date.

Over-time criteria

Over time if ANY of: (1) customer simultaneously receives and consumes benefits; (2) customer controls the asset as it is created or enhanced; (3) asset has no alternative use AND enforceable right to payment for work to date

If none is met, revenue is recognised at a point in time when control passes.

Input method (cost-to-cost)

Progress % = Costs incurred to date ÷ Total expected costs

Use only costs that reflect performance. Exclude costs such as materials delivered but not yet used.

Output method

Progress % = Value of work certified (or units delivered) ÷ Total contract value (or total units)

Direct measure of value transferred to the customer.

Cumulative revenue to date

Cumulative revenue = Transaction price × Progress %

Revenue for the year = cumulative revenue to date − revenue recognised in earlier years.

Cumulative profit and cost of sales

Cost of sales for the year = Cumulative costs recognised − costs recognised in earlier years; Profit = Revenue − Cost of sales

Under the input method, cost of sales equals costs incurred in the year.

Statement of financial position balance

Contract asset = Revenue recognised for which the right to payment is still conditional on something other than the passage of time; Receivable = amount where the right to payment is unconditional; Contract liability = consideration received or billed in advance of performance

Simplified assumption used in the Bina example: every amount invoiced is an unconditional right to payment, so it is a receivable. The contract asset is then cumulative revenue − cumulative amounts invoiced (if positive). If invoices exceed cumulative revenue, the excess is a contract liability.

Expected loss

If total expected costs > transaction price, recognise the full expected loss immediately

Treat the loss as a provision under IAS 37 to the extent not already reflected in the progress-based figures.

Principal test

Controls the good or service before transfer to customer → principal → revenue = gross price to customer

Cost paid to the supplier goes to cost of sales. Gross profit equals the margin earned.

Agent test

Arranges for another party to provide → agent → revenue = commission or fee only

Amount owed to the supplier is a liability, not revenue or cost of sales.

Agent commission

Commission = Customer price − Amount payable to principal

Or a stated percentage of the price. Check which the question gives.

Indicators of principal

Primary responsibility + inventory risk + pricing discretion

These are indicators of control, not a mechanical checklist. Judge the whole scenario.

Revenue with right of return

Revenue = price × units expected NOT to be returned

The units expected back go to a refund liability, not revenue.

Refund liability

Refund liability = price × units expected to be returned

Reassess the estimate at each reporting date.

Right-to-recover asset

Asset = cost × units expected to be returned (less recovery costs)

Credit cost of sales for the same amount.

Allocation by relative stand-alone selling price

Allocated amount = total price × SSP of item ÷ total of all SSPs

Use for service warranties, loyalty points and bundles.

Loyalty points stand-alone selling price

SSP of points = points expected to be redeemed × value per point

Use expected redemption, not points issued.

Revenue on redemption of points

Revenue = amount allocated × points redeemed to date ÷ total points expected to be redeemed

Deduct revenue already recognised in earlier years.

Assurance warranty

Dr Warranty expense, Cr Provision (IAS 37)

No separate revenue is deferred.

Costs to obtain a contract

Incremental cost, expected to be recovered → capitalise as asset; otherwise expense

Expedient: expense if amortisation period is one year or less. Costs incurred whether or not the contract is won are expensed.

Costs to fulfil a contract

Outside other standards AND directly related AND generate/enhance resources AND expected recovery → capitalise

All three conditions must be met. Overheads, wastage and costs of past performance are expensed.

Amortisation of contract costs

Annual charge = Capitalised cost × (goods/services transferred in year ÷ total expected transfer)

Use the pattern of transfer. Straight line is often the pattern if the service is evenly delivered.

Impairment of contract cost asset

Impairment = Carrying amount − (Remaining consideration expected − Costs still to be incurred)

Recognise in profit or loss only if the carrying amount is higher.

Contract balance classification

Performed, right conditional → contract asset; right unconditional → receivable; paid, or unconditional right to payment due, before performance → contract liability

Show net position per contract.

Quick revision

• The five steps: contract, performance obligations, transaction price, allocation, recognise revenue.
• Revenue is recognised when or as a performance obligation is satisfied, meaning control passes to the customer.
• A good or service is a separate performance obligation if it is distinct: the customer can benefit from it and it is separately identifiable in the contract.
• Allocate the transaction price in proportion to stand-alone selling prices.
• Variable consideration is included only to the extent a significant reversal of revenue is highly unlikely.
• Over time applies if one of three criteria is met; otherwise revenue is recognised at a point in time.
• For over-time revenue, use a reasonable progress measure such as costs incurred to total expected costs, or output.
• A principal controls the goods or service before transfer and reports gross revenue; an agent reports only its fee or commission.
• A standard warranty is accounted for under IAS 37; a warranty sold separately or giving extra service is a separate performance obligation.
• For sales with a right of return, recognise revenue only for items expected not to be returned, with a refund liability and a returned-goods asset.
• A contract asset is a right to consideration not yet unconditional; a contract liability is an obligation where payment came before performance.
• Incremental costs of obtaining a contract are capitalised if expected to be recovered, and amortised as the related revenue is recognised.

Common mistakes

• Recognising revenue when cash is received or the invoice is issued. Fix: Always ask when control passes. Cash received early is a contract liability, not revenue.
• Treating a bundle as one obligation when the parts are distinct. Fix: Test each item for being distinct. If so, allocate the single price by relative stand-alone selling prices.
• Treating every item listed in the contract as a separate performance obligation. Fix: Apply both tests to each promise. Combine items that are not separately identifiable, such as a service that customises the product.
• Concluding that installation is always a separate performance obligation. Fix: Ask whether the customer or another supplier could do the installation, and whether it significantly modifies the product. Customisation means one bundle.
• Allocating the list price instead of the discounted transaction price. Fix: Always start from the total price the customer pays, then split it using SSP ratios.
• Including all variable consideration without applying the constraint. Fix: Include variable consideration only to the extent a significant reversal is highly probable not to occur. Reassess each year.
• Treating revenue as recognised on delivery for every sale, or on invoicing or cash receipt. Fix: Always test control and the three over-time criteria first. Invoice and cash dates only affect receivables or contract balances, not the timing of revenue.
• Requiring all three over-time criteria to be met. Fix: Only one needs to be met. Criterion three has two parts that must both hold: no alternative use and an enforceable right to payment.
• Treating the entity as a principal just because it invoices the customer and receives the cash. Fix: Billing is not control. Ask who controls the item before transfer and who is responsible for fulfilment.
• Recognising the full customer price as revenue for an agent. Fix: For an agent, revenue is the commission only. The rest is owed to the principal.

Exam tips

• Name the step you are applying in written answers. Markers reward the structure of the model.
• In objective questions, read for hidden traps: discounts, rebates, deferred payment and amounts collected for third parties.
• Always state why you chose over time or point in time by referring to the contract terms.
• Show allocation workings clearly. Even if the final answer is wrong, method marks are available in Section C.
• Check your total revenue across all obligations does not exceed the transaction price.
• In OT cases, read the scenario for words such as customise, integrate, significantly modify and can be bought separately. They decide the answer.
• Always give a reason for your conclusion in Section C. State both tests, not just the result.
• Check the contract criteria first when a scenario mentions a customer in financial difficulty or an unapproved agreement.