22420 Chap.3 Revenue Recognition and Reporting Performance
Revenue Recognition and Reporting Performance
Five steps to revenue
AASB 15 recognises revenue when or as an entity satisfies a performance obligation by transferring control of a good or service.
The five steps are to identify the contract, identify the performance obligations, set the transaction price, allocate it on relative stand-alone selling prices, and recognise revenue either over time or at one point in time.
Performance beyond the headline profit
Revenue drives earnings, the most discussed accounting number, but the topic also covers non-GAAP measures, basic and diluted earnings per share under AASB 133, and the comparison of earnings with cash flows that shows the accruals created by applying the standards.
Why the bundle matters
Telecommunications handsets sold with service plans and products sold with servicing are the subject’s standard examples of multiple-element arrangements.
Each distinct promise is a separate performance obligation, so the price must be split before any revenue is recognised.
What this chapter covers
- 01
Income versus revenue: ordinary activities
- 02
Contract criteria, including probable collection
- 03
Performance obligations in bundled sales
- 04
Allocating the price on stand-alone selling prices
- 05
Three tests for satisfaction over time
- 06
Control indicators for a point in time
- 07
Variable and deferred consideration
- 08
Earnings per share and earnings versus cash flows
Worked example · free
Allocating a gym package price across three promises
- 1Stand-alone prices total $2,400, so each promise receives $1,800/$2,400 = 75% of its own price.
- 1Assessment $225, access $1,125 and coaching $450, which add back to $1,800.
- 11 July: Dr Cash $1,800; Cr Revenue $225; Cr Contract liability $1,575.
- 1To 31 December: access $1,125 × 6/12 = $562.50 and coaching $450 × 4/6 = $300 move from the contract liability to revenue.
Key terms
- Performance obligation
- A promise in a contract to transfer a distinct good or service to the customer.
- Transaction price
- The consideration the entity expects to be entitled to for transferring the promised goods or services.
- Stand-alone selling price
- The price at which a good or service would be sold separately, used to allocate a bundled price.
- Contract liability
- Consideration received for goods or services the entity has not yet transferred.
- Diluted EPS
- An alternative earnings per share measure under AASB 133, presented alongside basic EPS.
- Non-GAAP earnings
- A performance measure a company defines for itself outside the accounting standards.
Revenue Recognition and Reporting Performance FAQ
What is the difference between revenue and income?
Income covers both revenue and gains. Revenue is the part that arises in an entity’s ordinary activities, such as sales, fees, interest, royalties and rent, while a gain such as profit on selling a non-current asset is income but not revenue.
When is revenue recognised over time?
When at least one of three tests is met: the customer receives and consumes the benefit as the entity performs, the work creates or enhances an asset the customer controls, or it produces nothing the entity could redirect to another use and the entity can legally insist on payment for work to date.
What if collection of the price is doubtful?
If collection is not probable, the contract criteria are not met. Cash received is held as a liability and revenue waits until collection becomes probable or the contract ends.
How is progress measured on a long service contract?
With an input method, progress is the cost of work performed to date over total expected cost. Materials delivered but not yet used and advances to subcontractors who have not started are left out, because they do not reflect work done for the customer.
Does a volume discount delay revenue?
No. If the customer qualifies, revenue is simply measured net of the discount on delivery; where a discount depends on future events, the consideration is estimated as an expected value or a single most likely amount rather than waiting for the outcome.
Exam move
Learn the five steps as a sentence you can write in ten seconds, then practise two kinds of question: allocating a bundle on stand-alone prices with a check that the parts add back to the total, and deciding over time or point in time with the paragraph 35 tests. Finish with one input-method progress calculation that excludes uninstalled materials.
Finish with one deferred-payment sale, separating the interest from the revenue at the cash price.
Working through Revenue Recognition and Reporting Performance in 22420? Sia is AskSia’s AI Accounting tutor — ask any 22420 Revenue Recognition and Reporting Performance question and get a clear, step-by-step explanation grounded in how 22420 is taught and assessed. Read this chapter free, then take your hardest questions to Sia.
