Revenue: formula sheet

Key formulas

Contract existence criteria (step 1)

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

All five must be met. If not, do not apply the model. Reassess the criteria if facts and circumstances change. Until they are met, recognise consideration received as a liability. Recognise it as revenue only when the entity has no remaining obligations and has received substantially all of the consideration, which is non-refundable, or when the contract has been terminated and the consideration received is non-refundable. If the criteria are met later, start applying the model from then.

Distinct good or service (step 2)

Distinct if the customer can benefit from it on its own or with readily available resources AND it is separately identifiable in the contract

Both tests are needed. If not distinct, combine with other goods or services until a bundle is distinct.

Transaction price (step 3)

Fixed amounts + estimated variable consideration (constrained) ± significant financing effect + non-cash consideration at fair value − consideration payable to customer

Exclude amounts collected for third parties, such as sales tax. Variable consideration uses expected value or most likely amount, included only to the extent it is highly probable that a significant reversal of cumulative revenue will not occur.

Allocation (step 4)

Price allocated to obligation = Standalone selling price of obligation ÷ Total of standalone selling prices × Transaction price

Discounts are normally spread across all obligations pro rata unless there is observable evidence they relate to specific ones.

Recognition (step 5)

Revenue recognised when (or as) control of the promised good or service passes to the customer

Over time if one of the three over-time criteria is met. Otherwise at a point in time.

Distinct good or service

Distinct = capable of being distinct AND separately identifiable in the contract

Both tests must be met. If either fails, combine the item with others until you have a bundle that is distinct.

Indicators of not separately identifiable

Significant integration service OR significant modification/customisation OR highly interdependent/interrelated

Any one indicator points towards a single combined performance obligation. These are indicators, so use judgement.

Series guidance

Distinct items that are substantially the same + same pattern of transfer = one performance obligation

Typical for services provided continuously, such as cleaning, hosting or payroll.

Warranty treatment

Assurance-type warranty: IAS 37. Service-type warranty (separately priced or extra service): separate performance obligation

If the customer can buy the warranty separately, it is a service-type warranty.

Customer option

Separate performance obligation only if the option gives a material right

A discount that is available to any customer anyway is not a material right.

Transaction price

Fixed consideration + constrained variable consideration ± financing adjustment + non-cash consideration at fair value − consideration payable to customer (if not for a distinct good or service)

Exclude amounts collected for third parties.

Expected value

Σ (probability × amount)

Suits contracts with a large number of similar outcomes.

Most likely amount

Single most probable outcome

Suits binary outcomes, such as bonus achieved or not.

Constraint

Include variable consideration only to the extent it is highly probable that a significant reversal of cumulative revenue recognised will not occur when the uncertainty is resolved

Reassess at every reporting date.

Financing component

Revenue = present value of payments, discounted at the rate in a separate financing transaction

Interest income or expense = unwinding of the discount. Practical expedient: ignore if one year or less.

Refund liability

Consideration received (or receivable) − amount expected to be entitled to

Recognise as a liability, not as revenue.

Relative SSP allocation

Allocated price = (SSP of obligation ÷ Total of all SSPs) × Transaction price

Use the SSP at contract inception. Do not update it later for changes in SSP.

Discount in the contract

Discount = Total of SSPs − Transaction price

Spread across all obligations in proportion to SSP by default.

Residual approach

Estimated SSP = Transaction price − Sum of observable SSPs of other goods or services

Only if the item has a highly variable price or an uncertain price not yet established. Check the result is reasonable.

Allocation of changes in price

Later change in transaction price is allocated on the same basis as at inception

Amounts relating to an obligation already satisfied are recognised as revenue (or reduction) in the period of change.

Over-time criteria

Over time if ANY one of: (a) customer receives and consumes benefits as you perform; (b) customer controls the asset as it is created or enhanced; (c) no alternative use AND enforceable right to payment for work to date

Test these first. Criterion (c) needs both conditions to be met.

Cost-to-cost progress (input method)

Progress % = costs incurred to date ÷ total expected costs

Costs that do not reflect progress, such as wasted materials or inefficiencies, are excluded. Uninstalled materials may need adjusting.

Cumulative revenue

Cumulative revenue = transaction price × progress %

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

Point-in-time indicators

Present right to payment; legal title; physical possession; risks and rewards; customer acceptance

These are indicators of control transfer. None is decisive alone.

Output method examples

Surveys of performance; appraisals of results; milestones reached; units produced or delivered

Use the method that best depicts transfer of control to the customer.

Principal: gross revenue

Revenue = full price charged to the customer; cost of the goods or services = cost of sales

Use when the entity controls the good or service before it passes to the customer.

Agent: net revenue

Revenue = commission or fee = amount received from customer − amount paid to the supplier

Use when the entity only arranges for another party to provide the good or service.

Licence classification

Right to access → over time; right to use → point in time

Only if the licence is distinct. Otherwise combine it with other goods or services in the contract.

Sales-based royalty on IP licence

Recognise at the later of: (a) the subsequent sale or usage, and (b) satisfaction of the performance obligation

This applies to royalties promised in exchange for a licence of IP.

Bill-and-hold test

Substantive reason + identified separately + ready for transfer + cannot be used or redirected

All four must be met for the seller to recognise revenue before physical delivery.

Repurchase: forward or call option

Repurchase price < original price → lease; repurchase price ≥ original price → financing

No sale is recognised because the customer does not obtain control. A sale and leaseback is not a repurchase agreement; IFRS 16 deals with it.

Repurchase: put option

Significant economic incentive to exercise → lease if repurchase price < original price, financing if repurchase price ≥ original price; no significant incentive → sale with right of return

Compare the repurchase price with the expected market value at the date of repurchase to judge the incentive. Compare it with the original price to choose between lease and financing.

Costs to obtain a contract

Capitalise if incremental and expected to be recovered; otherwise expense

Practical expedient: expense if the amortisation period is one year or less.

Costs to fulfil a contract (all three needed)

Directly related + generates or enhances resources + expected to be recovered

Apply IAS 2, IAS 16 or IAS 38 first if they cover the cost.

Amortisation of capitalised costs

Amortise on a systematic basis consistent with transfer of the related goods or services

Include anticipated renewals if the cost relates to them.

Impairment of capitalised costs

Impairment = carrying amount of the cost asset − (remaining consideration expected, less costs directly related to providing the goods or services)

Recognise the excess in profit or loss; reverse if conditions improve, up to the amount without impairment.

Modification as separate contract

Distinct additional goods or services AND price increase = standalone selling price (adjusted for circumstances)

If both met, account for the new items as a new contract.

Modification not separate, remaining items distinct

Prospective: remaining consideration allocated to remaining distinct items

Past revenue is not changed.

Modification not separate, remaining items not distinct

Cumulative catch-up: revised progress × revised price − revenue recognised to date

Adjust revenue at the modification date.

Contract asset, receivable and contract liability

Unconditional right = receivable; conditional right = contract asset; payment received or due ahead of performance = contract liability

Net asset or liability is presented per contract.

Quick revision

• Five steps: contract, performance obligations, transaction price, allocation, recognition.
• Revenue is recognised when (or as) a performance obligation is satisfied by transferring control of the good or service to the customer. Risks and rewards are only one indicator of control, and cash receipt is not the test.
• A good or service is distinct if the customer can benefit from it and it is separately identifiable in the contract.
• Variable consideration is estimated using expected value or most likely amount, whichever predicts better.
• Include variable consideration only to the extent a significant reversal is highly unlikely.
• Adjust the transaction price for a significant financing component, and show interest separately.
• Allocate the price in proportion to standalone selling prices of each obligation.
• Over time applies if the customer simultaneously receives and consumes the benefits as the entity performs, the customer controls the asset as it is created, or there is no alternative use and an enforceable right to payment for performance completed to date.
• If none of the over-time criteria is met, recognise at a point in time when control passes.
• An agent recognises only its fee or commission, as it does not control the goods before transfer.
• Incremental costs of obtaining a contract are capitalised if you expect to recover them. As a practical expedient, the entity may recognise these costs as an expense when incurred if the amortisation period would be one year or less. This expedient relates to costs of obtaining a contract only, not costs to fulfil.
• Costs to fulfil a contract are capitalised only if they are outside the scope of another standard (such as IAS 2, IAS 16 or IAS 38), relate directly to a contract, generate or enhance resources used to satisfy obligations, and are expected to be recovered.
• A modification is accounted for as a separate contract if the scope increases because of added distinct goods or services and the price rises by an amount reflecting their standalone selling prices (adjusted for the circumstances of the contract).

Common mistakes

• Recognising revenue when cash is received or the invoice is raised. Fix: Ask only one question: has control passed? Cash and invoices matter only for contract assets, liabilities and receivables.
• Treating every item in a bundle as a separate obligation. Fix: Apply both distinct tests. Highly integrated or significantly customised items form one obligation.
• Treating every item in the contract as a separate performance obligation because each has a separate price in the invoice. Fix: Apply both distinct tests. If the items are highly interdependent or customised, combine them regardless of invoice lines.
• Applying only the first test (capable of being distinct) and stopping. Fix: Always write both tests. Show the second one explicitly, using integration, customisation and interdependence.
• Including the full expected bonus in revenue without applying the constraint. Fix: Always add a constraint sentence. If it is not highly probable that a reversal will not occur, include a lower amount, or none.
• Using expected value for a two-outcome bonus. Fix: For binary outcomes the most likely amount usually better predicts entitlement. Justify your choice in the scenario's terms.
• Allocating the discount to one item only, usually the item delivered last. Fix: Spread the discount proportionately unless the question gives evidence meeting the three conditions for specific allocation.
• Using the contract price shown for each item instead of the SSP. Fix: Always compare contract prices with SSPs. Allocate by SSP even if the contract states separate prices.
• Treating over time as the default and checking point in time first. Fix: Always test the three over-time criteria first. Point in time applies only if none is met.
• Saying criterion (c) is met because the asset has no alternative use. Fix: Require both no alternative use and an enforceable right to payment for work completed to date, including a reasonable profit margin.

Exam tips

• Name each step by its label in your answer. It makes marks easy for the marker to find.
• When a scenario looks like a trap, test step 1 first. A contract that fails the criteria changes the whole answer.
• Show the allocation as a one-line fraction so that method marks are earned even if your arithmetic slips.
• Use the exact words of the scenario when you explain control, such as customer controls the asset or Alpha has an enforceable right to payment.
• Add one professional skills point where it fits, such as questioning management's aggressive timing of revenue.
• Always state both tests for distinct, then apply them to the facts. Marks are given for the application, not for reciting the rule.
• For SBR scenarios, say what the answer means for revenue: separate obligations are allocated their own price and recognised separately.
• Check whether a warranty can be bought separately. That one fact usually decides the treatment.