- 20 Marks
FR – L2 – Q12 – Revenue Recognition
Question
12 SALE OF GOODS AND LEISURE FACILITIES
“Revenue is income arising in the course of an entity’s ordinary activities.”
IFRS 15 sets out principles to be applied in order to report useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from a contract with a customer.
Required
(a) State the core principle described by IFRS 15 in the recognition of revenue and list the five steps to be followed in applying this core principle.
(b) Zest Ltd runs a health club which provides sports and leisure facilities. It charges a fixed annual subscription, payable in advance, which entitles members to use most of the facilities (e.g. gym, swimming pool). Additional fees are payable for specific activities (e.g. sauna, squash courts) as used.
Explain in detail how Zest Ltd should recognise revenue from membership subscriptions and additional activities.
Answer
(a) IFRS 15 core principle
Revenue must be recognised in a manner that depicts the transfer of goods services to customers and at an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services.
5 step model
Step 1: Identify the contract(s) with the customer
Step 2: Identify the separate performance obligations
Step 3: Determine the transaction price
Step 4: Allocate the transaction price to the performance obligations
Step 5: Recognise revenue when or as an entity satisfies performance obligations.
(b) Revenue recognition
Revenue is recognised when (or as) a company satisfies a performance obligation by transferring a promised good or service to a customer.
A performance obligation might be satisfied over time (in which case revenue would be recognised over time) or at a point in time (in which case revenue is recognised at that point in time).
A company must identify at the inception of a contract whether a performance obligation will be satisfied over time. This is the case if one of the following criteria is met:
the customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs;
the company’s performance creates or enhances an asset (for example, work in progress) that the customer controls as the asset is created or enhanced; or
the company’s performance does not create an asset with an alternative use (to the seller) and the entity has an enforceable right to payment for performance completed to date.
If a performance obligation is satisfied over time an entity needs a mechanism to identify the extent to which the performance obligation has been met.
If a performance obligation is not satisfied over time it is satisfied at a point in time. In this case, the entity must identify when that is.
Membership subscriptions
Zest Ltd has incurred a performance obligation to provide each member with access to the health club’s facilities for a period of 12 months upon advance payment of an annual membership subscription.
The annual subscription must be recognised as a liability when first received. This is then recognised as revenue as Zest Ltd meets its performance obligation. The obligation is to provide access but the customer does not have to attend the club.
A customer receives and consumes the benefits of Zest Ltd’s performance as Zest Ltd makes the health club available for the customer’s use.
The best measure of progress towards complete satisfaction of the performance obligation over time is a time-based measure.
Additional fees
Revenue should be recognised at the point in time that these services are provided (purchased by the member). It could be argued that the provision of access to the squash court results in the customer simultaneously receiving and consuming the benefits provided by the entity’s performance. However, this is over a very short period and, as such, the argument is not really relevant.
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