Revenue Recognition and Receivables
What you must know
Apply the five-step model: identify the contract with a customer; identify performance obligations; determine the transaction price; allocate the price to the obligations; recognise revenue when (or as) each obligation is satisfied. Master variable consideration (expected value or most likely amount, constrained), significant financing components, non-cash consideration, and consideration payable to a customer. Distinguish recognition over time (customer controls the asset as created, or the asset has no alternative use and there is a right to payment for progress) from recognition at a point in time. For receivables, know initial measurement at transaction price, subsequent measurement of the loss allowance under the expected credit loss model (simplified approach for trade receivables: lifetime ECL), and derecognition on transfer of risks and rewards.
Traps candidates fall into
- Recognising revenue when cash is received rather than when control transfers.
- Forgetting to constrain variable consideration to the amount highly probable not to reverse.
- Allocating a discount entirely to one performance obligation instead of proportionately, unless evidence supports otherwise.
- Treating a warranty as a separate performance obligation when it only assures the product complies with agreed specifications.
- Ignoring the financing component when payment timing exceeds one year and the difference is significant.
- Recording the loss allowance as a direct write-off of the receivable rather than through a contra-asset allowance.
Rule of thumb
Ask: what did the customer obtain control of, and when? Then ask: how much of the transaction price is variable, and is it constrained? For receivables, always use the forward-looking ECL model, not just past-due ageing.
Worked example
A contract price is 1,000,000 for equipment plus installation. Standalone prices are 900,000 and 300,000 (total 1,200,000). Allocate: equipment 750,000 (900/1,200 × 1,000,000), installation 250,000. Recognise equipment revenue when control passes and installation revenue as installation progresses.