International Accounting Standards Board

Recently, the International Accounting Standards Board (IASB) have issued a new standard on the recognition of revenues, The HKFRS 15 “Revenue from Contracts with Customers”, which provide a single revenue recognition method for every firms and companies to follow. Comparing to the existing accounting standards HKAS 18 “Revenue” and HKAS 11 “Construction Contracts”, the existing standards only cover for limited situations on how to recognize revenues or when to recognize them therefore, the accounting method will be different between different companies when facing the situation not mentioned in the standard. The comparison between entities will decreased. As a result, the new standard will apply a five step model to help accountants to determine the amount of the revenue and when to recognize it. As a result, the revenue records will no longer be different between different businesses or companies in the situations the old standard did not covered.

According to the HKFRS 15 “Revenue from Contracts with Customers”, revenues should be recognized when the control of the goods or services transfers to customers at the amount which the company expects to be entitled. Companies now have to follow five steps to finds out when and how to recognize revenues. First, Entities should identify the contract with a customer. The contract should first meet 4 criteria, that it is probable for the company to collect the considerations, it can identified the rights to goods, services and payment terms, it has commercial substance and both parties are committed to their obligations. Sometimes two or more contracts should be record as one when the contracts are negotiated together with the same commercial objective or when the amount of consideration will be affect by another contract or the goods or service have the same performance obligation. Compare to the old standard, this step can lower the chance of problematic contracts and also impairment losses.

After identifying the contract with a customer, Entities should identify the performance obligations in the contract which means if the promised goods or services are distinct. The first criteria is there will be benefit for the customer from the goods or services and the second criteria is the transfer of the good or service is not identifiable with other promises in the contract to the customer. This step can unbundled goods and services from others in contracts so that it will be easier to recognize revenue of the goods and services separately.

The third step is to determine the transaction price, which is the price the company should be entitled by giving the goods or services to the customer. There are mainly four factors. First, variable consideration, the risk of revenue reversal should be considered and add into the price. Second, Consideration payable to a customer, there are three way to recognize the consideration payable to a customer, a distinct goods or service payment or a reduction of transaction price or combine these two. Third, non-cash consideration, fair value is used to calculate the non-cash consideration when it is reasonable to estimate. Or else, the stand-alone selling price is used. Forth, significant financing component, if there is a financing component, the amount should be adjusted to show the time value of money. Compare to the old standard, this step may be more complex in calculating the revenue but this will be more accurate on the amount of the revenue.