IFRS 15 Revenue from Contracts with Customers (contents page is here) introduced a single and comprehensive framework which sets out how much revenue is to be recognised, and when. The core principle is that a vendor should recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the vendor expects to be entitled in exchange for those goods or services. See a summary of IFRS 15 here. Collectability as a criterion to identify a contract with a
Under the old standard IAS 18 Revenue, an entity assessed collectibility when determining whether to recognize revenue. Under IFRS 15, the collectibility criterion is included as a gating question designed to prevent entities from applying the revenue model to problematic contracts and recognizing revenue and a large impairment loss at almost the same time.
Assessment of collectibility is the fifth and final criterion for identifying a contract. The nature of this assessment is similar to assessment that a company makes to determine whether certain accounts receivables have become uncollectible and subject to a bad debt provision.
If, at the outset of an arrangement, a company assesses that collectibility of the debt from a customer is questionable, it cannot recognize any revenues until it receives the amount due or the circumstances change so that collectibility becomes reasonably assured. Thus, in certain instances, a company can use a cash-basis method to satisfy the collectibility condition of identifying a contract.
Inclusion of the collectability criterion in recognising an agreement with a customer as a contract with a customer in IFRS 15 is to force a reporting entity to only record real sales transactions as revenue that regularly will be received in cash. A reporting entity under IFRS 15 including ‘fake’ sales transactions in revenue is now very clearly reporting fraudulent revenue numbers. So the pressure is now much more on each reporting entity to properly account for real sales transactions in revenue, ultimately on a cash-basis for some of its sales transactions. Document the reasoning why the collectibility criterion for each customer is assessed and which customers are to be recognised on a cash-basis only. Collectability as a criterion to identify a contract with a
Collectability as a criterion to identify a contract with a