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.
This section is part of step 3 determining the transaction price. Consideration payable to a customer includes cash amounts that a vendor pays, or expects to pay, to a customer (or to other parties that purchase the vendor’s goods or services from the customer), credits or other items such as coupons or vouchers that can be applied against amounts owed to the vendor. Alternatively, the payment may be part or all of an amount payable to the customer in return for the supply of goods or services.
Consideration payable to a customer is accounted for as a reduction of the transaction price (and hence, a reduction of revenue), unless the payment to the customer is in exchange for a distinct good or service that the customer transfers to the vendor.
A vendor might sell goods or services to a customer and at the same time purchases goods or services from the same customer. If the amount of consideration payable to the customer exceeds the fair value of a distinct good or service that the vendor receives in exchange, the difference is accounted for as a reduction in the vendor’s sales transaction price.
If a vendor cannot reasonably estimate the fair value of a good or service received from the customer, then the full amount of the consideration payable to the customer is deducted from the vendor’s own transaction price (and hence revenue).
When the consideration payable to a customer is treated as a reduction of the transaction price the reduction of revenue is recognised when (or as) the later of either of the following occurs:
- The vendor recognises revenue for the transfer of the related goods or services to the customer
- The vendor pays, or promises to pay, the consideration, even if the payment is conditional on a future event. Such a promise may be implied by the vendor’s customary business practices.
A key point is that any amount paid by a vendor to its customer will be accounted for as a reduction in revenue, unless that payment is in return for a distinct good or service.