(Posted April 2025)
Accounting for revenue is a commonly tested topic on the CFE, and there are several different types of revenue recognition concerns that may arise. This blog focuses on some of the key technical considerations under Accounting Standards for Private Enterprises (ASPE) 3400, Revenue.
Sale of Goods and Rendering of Services
This issue requires an assessment of the appropriate timing for revenue recognition. Typically, the case will provide a detailed set of facts relating to the sale of goods and/or rendering of services and will indicate that the entity in question has either recorded or not recorded the related revenue during the fiscal period. You will need to determine whether this is appropriate, using the concepts and steps explained below.
Sale of Goods
When goods are sold, performance is considered to have been achieved when the significant risks and rewards of ownership have been transferred to the buyer from the seller, such that all significant acts have been completed and the seller no longer retains any continuing managerial involvement in, or effective control of, the goods transferred. If the key issue in this scenario is performance, you may also need to assess the detailed criteria that must be met for performance to be achieved:
- Persuasive evidence of an arrangement exists
- Delivery has occurred or services have been rendered
- The seller’s price to the buyer if fixed or determinable
In addition to the risks and rewards described above, two additional criteria must be met for revenue to be able to be recognized:
- The consideration to be received from the sale of goods, as well as the extent to which goods may be returned, can be measured reliably, with reasonable assurance
- Ultimate collection from the customer can be reasonably assured
For the first criterion (commonly referred to as “measurement”), if goods can be returned, and the seller cannot reliably estimate the extent of returns that will arise (e.g., because they lack a sufficient operating history with this particular type of good), revenue may need to be deferred until the return period ends. Conversely, if a reliable estimate of returns can be determined, revenue can be recognized at the time that the other relevant criteria are met with a returns provision (contra-revenue account).
For the second criterion (commonly referred to as “collection”), if the amount to be collected by the seller is not certain and they are not able to reliably estimate the uncollectible amount, revenue may need to be deferred until actual collection occurs. Conversely, if a reliable estimate of uncollectible amounts can be determined, revenue can be recognized at the time that the other relevant criteria are met with an allowance for uncollectible accounts.
Rendering of Services and Long-term Contracts
When services and long-term contracts are rendered, performance is determined using either the percentage of completion method or the completed contract method, depending on which method better relates the revenue to the work accomplished.
- Percentage of completion is typically used when the service contract requires more than one act to be performed by the seller. Revenue is recognized gradually over time in proportion to the performance of each act, using a rational and consistent basis. Examples of this include total sales value, costs incurred, extent of progress, number of acts, or a straight-line basis (if an indeterminate number of acts exist). The amount billed by the seller is not considered an appropriate basis of measurement.
- The completed contract method is typically only used when there is one act to be performed by the seller or when the seller is unable to reliably measure the extent of completion throughout the service contract. Revenue is recognized at the completion of the service contract.
If the key issue is performance for the rendering of services, you may also need to assess the detailed criteria that must be met for performance to be achieved:
- Persuasive evidence of an arrangement exists
- Delivery has occurred or services have been rendered
- The seller’s price to the buyer if fixed or determinable
Further, reasonable assurance must exist regarding the measurement of the consideration that will be derived from rendering the service or performing the long-term contract.
How to Write on the CFE
While you must adapt to the issue and case facts presented to you, there is a common approach that can often be taken to develop sufficient depth in your analysis.
1. Determine whether the seller is providing a good or a service
This is important, as the relevant criteria to assess differ based on the nature of the revenue.
2. Assess the relevant criteria using case facts
Using your determination from above, assess the relevant criteria using case facts to determine at what point each is met. It is ideal to use a “bullet-point” structure when formatting your response, in which the relevant criteria are listed out, and case facts are applied beside each, along with a clear conclusion as to whether each criterion is “met” or “not met” at a particular point in time.
3. Conclude
Using your analysis from above, conclude as to when revenue should be recognized. Assuming sufficient information is provided, quantify the relevant adjustment required, especially if the entity already recorded an amount in error. When concluding, if revenue should be deferred and recognized in a future period, it is important to explain when and how it should be recognized in that period (do not simply conclude to defer it in the current period).
Other Issues
While not an exhaustive list, below are some examples of other revenue recognition issues that could arise, either separate from, or in conjunction with, the above examples.
Multiple deliverables
In some instances, a single transaction may have multiple separately identifiable components. Each component has a stand-alone value and its fair value can be reasonably measured. In these situations, the revenue recognition timing criteria must be assessed for each separate component, whereby proceeds are allocated to each component based on their relative fair values.
Bill and hold
This is when an entity bills a customer for a product but does not physically send the goods to them until a future date. In these situations, when delivery has not yet occurred, revenue can only be recognized if each of the following conditions have been met:
- The risks of ownership have passed to the buyer
- The customer made a fixed commitment to purchase the goods
- The buyer must request that the transaction be on a bill-and-hold basis, and must have a substantial business purpose for this request
- There must be a schedule for delivery of the goods that is reasonable and consistent with the buyer’s business purpose
- The seller must not have retained any specific performance obligations such that the earnings process is incomplete
- The goods ordered must have been segregated from the seller’s other inventory and not be available for use to fill other orders
- The product must be complete and ready for shipment
Consignment
This is when an entity (consignor) delivers a product to another party (consignee) to sell it on their behalf. If the product does not sell, it can be returned to the consignor without an obligation to pay for the product. In such situations, performance is not achieved when the consignor transfers the product to the consignee, and revenue should only be recognized when the consignee sells the product.
Gross vs. net
When an entity is engaged in a revenue-generating relationship with a third party, either through the sale of goods or rendering of services, you must determine whether it is the principal or an agent.
- The principal records revenue on a gross basis
- An agent records the commission (net) amount as revenue
To determine whether an entity is a principal in the transaction, use case facts to assess whether the entity:
- Has primary responsibility for providing the goods or services to the end customer
- Is exposed to inventory risk before and/or after the customer receives the good or service
- Has latitude in establishing prices
- Bears credit risk for the amount receivable from the customer
In addition to above, if the entity is earning a predetermined amount based on the agreement terms, this feature indicates that the entity is acting as an agent.
Remember to conclude on the appropriate treatment based on an overall evaluation of the factors.
Royalties, interest, and dividends
These revenue sources are to be recognized when reasonable assurance exists regarding measurement and collection, and performance has been achieved on the following bases:
- Royalties – as they accrue
- Interest – on a time proportion basis
- Dividends – when the shareholder’s right to receive payment is established
ASPE versus IFRS
The steps in recognizing revenue under IFRS 15 and ASPE 3400 are fundamentally different as noted above and in our Technical Spotlight blog on IFRS Revenue Recognition. Also, here are some other significant differences:
- IFRS 15 does not allow the completed contract method
- IFRS 15 includes measurement standards requiring fair value for consideration received or receivable. ASPE does not provide specific guidance.
- IFRS 15 requires the use of the effective interest method for recognition of interest revenue. ASPE 3400 also allows the straight-line method.