Revenue recognition

Keywords: Mazars, Thailand, Accounting, TAS 18, TFRS, Dividends, Royalties, Interest, Sale of Goods, Provision of Services

1 February 2016

(a) the sale of goods;

(b) the provision of services; and

(c) interest, royalties, and dividends:

• Interest: charges for the use of cash or cash equivalents or amounts due to the entity;
• Royalties: charges for the use of long-term assets of the entity, such as patents, trademarks, copyrights, and computer software; and
• Dividends: distributions of profits to holders of equity investments in proportion to their holdings in a particular class of capital.

Sale of goods

Revenue from the sale of goods shall be recognized when all of the following conditions have been met:

(a) the entity has transferred to the buyer the significant risks and rewards of ownership of the goods;

(b) the entity retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold;

(c) the amount of revenue can be measured reliably – it is probable that the economic benefits associated with the transaction will flow to the entity; and

(d) the costs incurred or to be incurred in respect of the transaction can be measured reliably.

For example:

Company Z sells ventilation equipment from its factory on a CIF basis to a customer. The contractual terms state that insurance is taken out by Company Z for the period that the ventilation equipment is in transit.

In addition, Company Z has to pay the costs and freight necessary to bring the goods to the named port of destination, but the risk of loss or of damage to the goods is transferred from Company Z to the customer when the goods pass the ship’s rail.

As the risk of loss is transferred when the ventilation equipment crosses the ship’s rail, Company Z should recognize the revenue at that point. 

Provision of services

Revenue from the provision of services shall be recognized when the outcome of a transaction involving the rendering of services can be estimated reliably. Revenue associated with the transaction shall be recognized by reference to the stage of completion of the transaction at the end of the reporting period.  The outcome of a transaction can be estimated reliably when all of the following conditions are met:

(a) the amount of revenue can be measured reliably;

(b) it is probable that the economic benefits associated with the transaction will flow to the entity;

(c) the stage of completion of the transaction at the end of the reporting period can be measured reliably; and

(d) the costs incurred for the transaction and the costs to complete the transaction can be measured reliably.

For example:

Entity A is an accounting firm that provides accounting services and tax consulting work. During November 2015, Entity A provided tax consulting work valued at 150,000 baht to one of its clients.  However, the client does not pay for the consulting work until the following February.

According to the revenue recognition principles mentioned above, Entity A should record the revenue in November 2015, because the revenue was realized and earned in November 2015, even though it was not received until February 2016.

Interest, royalties, and dividends

Revenue shall be recognized on the following bases:

(a) interest shall be recognized using the effective interest method set out in IAS 39;

(b) royalties shall be recognized on an accrual basis in accordance with the substance of the relevant agreement; and

(c) dividends shall be recognized when the shareholder’s right to receive payment is established.

For example:

On 30 June 2015, Company Q’s board of directors declared a cash dividend of 4.25 baht per share for Company Q's 200,000 outstanding shares, effective on 31 July 2015.  The dividend will be paid to the shareholders, the parent company, on 30 September 2015.

Therefore, Company Q should record the dividend payments on 30 June 2015, as follows:

On 30 September 2015, Company Q will pay the dividends, and should record the transaction as follows:

Moreover, the shareholders who receive the dividend should recognize the dividend income at 31 July 2015, because the shareholders have a right to receive the dividend payment on that date.

Reference: TAS 18