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Revenue Standard : Replacing Deferred Revenue accounting with Performance Obligation accounting

Posted on February 9th, 2017 by Sanjit Anand |Print This Post Print This Post |Email This Post Email This Post

asc606-readyAs we know new IFRS15 standard replaced Deferred Revenue accounting with Performance Obligation accounting.

At a certain point, you owe your customer to deliver what they have ordered.

Infact, IFRS15 has not replaced the accounting principle that orders do not go on the balance sheet.

Rather, at the point when “either party acts in reliance on the contract”, you must accrue your obligation to perform.

The offset is an asset is your right to invoice for what you will have performed.

The table below explains the differences between deferring revenue and accruing performance obligations. The timing is different, the valuation is different, and the supporting data is different.

 

Old Standard: Deferred Revenue Accounting New Standard: Performance Obligation Accounting
You defer that part of a sales invoice you can’t recognize as revenue You accrue for goods and services that you owe to customers because either you or they have relied on the contract.,You don’t actually defer
You value the deferral at fair value, and it is “non-monetary” You value the accrual at estimated consideration, and it is a “monetary” debt
Calculate and book the liability when you issue invoices Calculate the liability at inception, and book it when “either party acts” – earliest of “shipping” or invoicing*
Liability is a list of invoices not yet posted to the P&L, in full or in part, for future release to the P&L Liability is a list of goods & services you actually owe to customers, for future satisfaction via transfer
Book the invoiced amount to the P&L when you meet the regulatory definition (special by industry) Book revenue into the P&L when you satisfy the customer no “special” rules), billed or not

Though The core principle as stated in the IFRS is to:
“Recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to exchange for those goods or services.”

The Core principle identifies five classical steps for an entity should take in order to comply as below:

  • Identify the contract(s) with the customer
  • Identify the Separate Performance Obligations
  • Determine the Transaction Price
  • Allocate The transaction Price
  • Recognize the Revenue when a performance obligation is satisfied

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