Money received for the rendering of services can be recognized as revenue in the books of the seller once the outcome of the transaction can be measured reliably which means the following two requirements must be met:
- It must be probable that the future economic benefits associated with the transaction will flow to the seller.
If doubts arise about any of the items in the first column, the recognition of amounts regarding the service transaction will be done as set out in the second column:
|If uncertainty exists about:||Recognition will be as follows:|
|Collectability of revenue already recognised||Recognise expenses incurred (No adjustment made to revenue already recognised)|
|The amount that might be uncollectable||Recognise amount of expenses incurred|
- The following four criteria must be reliably measurable:
- Revenue amount (Please Note: Where services are exchanged for services of a similar nature and value, the exchange does not generate revenue. Where services are exchanged for services of a dissimilar nature, the exchange will generate revenue.)
- Amount of costs already incurred
- Amount of costs still to be incurred to complete the transaction
- Stage of completion at the end of the relevant reporting period
Once the four criteria have been measured reliably, the recognition of revenue will take place as set out in the second column below. Note that the stage of completion can be measured by a percentage as well as three other methods which appear as the last three bullets.
|Criteria that must be met:||Recognition will be as follows:|
|Amount of revenue||Recognise revenue according to stage of completion (%)|
|Costs already incurred|
|Costs to be incurred in order to complete service transaction|
|Stage (%) of completion at the end of the reporting period|
|• If one act is more significant than any other act||Recognise revenue when significant act has been completed|
|• If there is an unknown number of acts to be performed||Recognise revenue according to the straightline method|
|• If another method will provide a better estimate of the stage of completion||Recognise revenue according to such other method|
The four criteria can usually be measured reliably once the buyer and seller to the service transaction agreed upon the following:
- The rights of both parties;
- Consideration to be paid; and
- Manner and terms of settlement.
If the outcome of a service transaction cannot be measured reliably, revenue will still be recognised in the books of the seller but only up to the amount of expenses incurred which were recognised and are recoverable.
Circumstances where the outcome of a service transaction cannot be estimated or measured reliably can be any of the following:
- There is doubt about the probability that future economic benefits associated with the transaction will flow to the seller because:
- It is uncertain whether the revenue already recognised will be collectable.
- Uncertainty exists about the amount that might be uncollectable.
Any of the following items related to the service transaction cannot be measured reliably:
- Revenue amount.
- Amount of costs already incurred.
- Amount of costs still to be incurred to complete the transaction.
- Stage of completion at the end of the reporting period.
These are in short the basic principles for the recognition of revenue from the rendering of services. The more specialized topic of the recognition of revenue from construction contracts falls outside the scope of this article. However, if you would like more information on either one of these topics please contact your financial advisor.
This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or ommissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)
- IFRS for SMEs: A summary by W Consulting and SAICA
- PWC Training Material for IFRS for SMEs
- IFRS Foundation: Training material for IFRS for SMEs