In making the collectability assessment, an entity considers the customer’s ability and intention (which includes assessing its credit-worthiness) to pay the amount of consideration when it is due. This assessment is made after taking into account any price concessions that the entity may offer to the customer. (IFRS 15 9(e))
Under the revenue standard, the collectability criterion is included as a gating question designed to prevent entities from applying the revenue model to problematic contracts and recognising revenue and a large impairment loss at the same time. The collectability criteria are likely to be met for many routine customer contracts. (IFRS 15 9)
Example Assessing collectibility for a portfolio of contracts
Wholesaler sells sunglasses to a large volume of customers under similar contracts. Before accepting a new customer, Wholesaler performs customer acceptance and credit check procedures designed to ensure that it is probable the customer will pay the amounts owed. Wholesaler will not accept a new customer that does not meet its customer acceptance criteria.
In January 20X8, Wholesaler delivers sunglasses to multiple customers in exchange for consideration totaling $100,000. Wholesaler concludes that control of the sunglasses has transferred to the customers and there are no remaining performance obligations.
Wholesaler concludes, based on its procedures, that collection is probable for each customer; however, historical experience indicates that, on average, Wholesaler will collect only 95% of the amounts billed. Wholesaler believes its historical experience reflects its expectations about the future. Wholesaler intends to pursue full payment from customers and does not expect to provide any price concessions.
How much revenue should Wholesaler recognize? Assessing collectibility for a portfolio of contracts
Because collection is probable for each customer, Wholesaler should recognize revenue of $100,000 when it transfers control of the sunglasses. Wholesaler’s historical collection experience does not impact the transaction price in this fact pattern because it concluded that the collectibility threshold was met (that is, the contracts were valid) and it did not expect to provide any price concessions.
Wholesaler should evaluate the related receivable for impairment based on the relevant financial instruments standard.