Effective from 1 Jan 2018, all companies in Singapore are to adopt and implement Financial Reporting Standard 115 (FRS 115) Revenue from Contracts with Customers. Based on the International Financial Reporting Standard 15 (IFRS 15), FRS 115 will bring more clarity in revenue recognition and align to a cohesive standard across more than a hundred countries. Whether you are running/managing a large multinational corporation or a small medium enterprise, FRS 115 will affect the day-to-day operations. It is necessary to equip yourself to ensure a smoother transition in your business.
The core principle of FRS 115 is that an entity recognises revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to for the stated goods or services.
We will not be discussing on the following which has brought under FRS 115;
FRS 11 Contracts; INT FRS 113 Customer Loyalty Programmes; INT FRS 115 Agreements for the Construction of Real Estate; INT FRS 118 Transfers of Assets from Customers; and INT FRS 31 Revenue—Barter Transactions Involving Advertising Services.
The core principle of FRS 115 is that an entity recognises revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
Revenue recognition by an entity is performed in accordance to the application of the following steps:
Step 1: Identify the contract(s) with a customer— a contract is an agreement with enforceable rights and obligations between two or more parties.
The requirements of FRS 115 apply to each contract that has been agreed upon with a customer and meets specified criteria. In some cases, FRS 115 requires an entity to combine contracts and account for them as one contract. FRS 115 also provides requirements for the accounting for contract modifications.
Step 2: Identify the performance obligations in the contract—includes promises for transfer goods or services to a customer in exchange for consideration stated in the contract.
If goods or services are distinct in nature, the performance obligations will be accounted separately. A good or service is considered distinct if the customer can benefit from the good or service individually or in tandem with other resources that are readily available to the customer. The promise to transfer good or service from the entity to the customer is separately identifiable from other promises stated in the contract.
Step 3: Determine the transaction price—the transaction price is the contractual consideration that an entity expects to receive in exchange for the transference of the promised goods or services to the customer.
The transaction price can be in the form of fixed amount or may at times include variable consideration or alternative consideration in other forms apart from cash. The transaction price will be adjusted in consideration of the effects of the time value of money if a significant financing component is included for consideration payable to customer in the contract.
If there is variable consideration, the entity makes an estimate on the entitled amount of consideration for the promised goods or services delivered. There is a high chance for non-occurrence of a significant reversal in the cumulative revenue when the associated uncertainty for the variable consideration is resolved. Only then will the estimated variable consideration be included in the transaction price.
Step 4: Allocate the transaction price to the performance obligations in the contract—an entity determines the transaction price by allocating a relative standalone selling price per performance obligation for every distinct good or service stated in the contract.
When the entity allocates the discount or variable consideration to one or more, but not all, contractual performance obligations, the discount or variable consideration may be included in the transaction price in relation to part of the contract (or specific goods or services).
Step 5: Recognise revenue (as or when) the entity satisfies a performance obligation—revenue is recognized by the entity (as or when) there is satisfaction of a performance obligation via transfer of promised good or service to customer (when customer is in control of good or service). The amount of recognized revenue is the amount allocated to fulfilling the said performance obligation.
A performance obligation may be satisfied either over time (for transfer of services to customer) or at a point in time (for transfer of goods to customer). For performance obligations satisfied over time, revenue is recognized by the entity over time via implementing a suitable method for measurement of entity’s progress towards the performance obligation’s complete fulfilment.
Implementing FRS 115 in the businesses is unavoidable. It is important to get educated on the mechanics of this new revenue reporting standard. If you require assistance in navigating the FRS 115 requirements for your business, contact AM Corporate Services for a personalised session today.
Disclaimer: The information provided is general in nature and is not intended as professional advice. The information contained in this blog were collated as at October 2018 based on information available at that time.