IFRS FOR SME’S: RECOGNITION OF REVENUE FROM THE RENDERING OF SERVICES

A2_BBefore revenue from the rendering of services can be recognized in the books of the seller there are two issues that must be solved: when must the revenue be recognized and at which amount?

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:

  1. It must be probable that the future economic benefits associated with the transaction will flow to the seller.

Table 1

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
  1. 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

Table 2

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)

Reference List:

  • 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

TAX PENALTIES: UNDERSTATEMENT PENALTIES IN THE TAX ADMINISTRATION ACT

A1_BThe Tax Administration Act, 28 of 2011, introduced the notion of ‘understatement penalties’ which are levied on a percentage based method. The penalties are levied depending on which behaviour is exhibited by the taxpayer, to be classified in terms of the below table contained in section 223(1):

1 2 3 4 5 6
Item Behaviour Standard case If obstructive, or if it is a ‘repeat case’ Voluntary disclosure after notification of audit or investigation Voluntary disclosure before notification of audit or investigation
(i) ‘Substantial understatement’ 10% 20% 5% 0%
(ii) Reasonable care not taken in completing return 25% 50% 15% 0%
(iii) No reasonable grounds for ‘tax position’ taken 50% 75% 25% 0%
(iv) Gross negligence 100% 125% 50% 5%
(v) Intentional tax evasion 150% 200% 75% 10%

It is not clear how a taxpayer’s behaviour is to be classified for purposes of considering at which rate an understatement penalty is to be imposed, or if it is even possible that certain taxpayer behaviour may not even fall within the table to begin with. Suffice it to say that in terms of section 102(2) of the Tax Administration Act, the burden of proving whether the facts on which SARS based the imposition of an understatement penalty is upon SARS.

In terms of section 222, the penalty may only be levied where an ‘understatement’ is present, being any prejudice to SARS or the fiscus as a result of:

  1. A default in rendering a return;
  2. An omission from a return;
  3. An incorrect statement in a return; or
  4. Where no return was required, the failure to pay the correct amount of tax.

To calculate the penalty levied, the applicable percentage in the above table is applied to the shortfall amount, being the tax effect in question for which the taxpayer is penalised. For example, if an income tax deduction claimed by a taxpayer is disallowed by SARS which seeks to penalise the claiming of the deduction, the applicable penalty percentage is applied to the tax effect that the deduction would have had had it been allowed.

Taxpayers are enabled through section 224 to object against the imposition of an understatement penalty. What is further noteworthy is that, in the event that a penalty is levied for a ‘substantial understatement’, the penalty must be remitted by SARS if the taxpayer was in possession of a positive tax opinion from an independent registered tax practitioner supporting its tax position. It therefore makes sense, if only to mitigate against the levying of penalties, to obtain a tax opinion from a registered tax practitioner prior to entering into a transaction.

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)