How can accounting review for revenue recognition benefit your business?

IFRS 15 Revenue from Contracts with Customers

IFRS 15 introduces a comprehensive framework for recognizing revenue that replaces the previous revenue recognition guidance under IAS 18 and IAS 11. The standard is applicable to all industries and aims to provide a more consistent and principles-based approach to revenue recognition.

When a revenue is to be recognized as per IFRS 15:

Over Time Recognition:

Revenue is recognized over time if one of the following criteria is met:

1. The customer simultaneously receives and consumes the benefits provided by the entity's performance.
2. The entity's performance creates or enhances an asset controlled by the customer.
3. The entity's performance does not create an asset with an alternative use, and the entity has an enforceable right to payment for performance completed to date.

Examples of situations where revenue might be recognized over time include long-term construction projects, software development, and services provided over a period.

At a Point in Time Recognition:

Revenue is recognized at a point in time if the control of the goods or services is transferred to the customer at that specific point. Control is the key concept in IFRS 15, indicating the ability to direct the use of, and obtain substantially all the remaining benefits from, the goods or services.

Examples of situations where revenue might be recognized at a point in time include the sale of goods upon delivery, the completion of a service, or the transfer of ownership of an asset.

Determining the Transfer of Control:

To determine when control is transferred, entities consider indicators such as the transfer of physical possession, a customer's significant risks and rewards, and the point at which the customer has the ability to direct the use of the goods or services.

Performance Obligations:

Revenue is allocated to distinct performance obligations within a contract. Each performance obligation may be satisfied over time or at a point in time, depending on the nature of the obligation.

Why accounting review is important for your business?

The timing of revenue recognition plays a crucial role in budgeting and closing the gap between projected and actual revenues. Unfortunately, an all-too-common fraudulent practice involves intentionally overstating/understating (delayed revenue recognition) revenue, thereby distorting financial results and performance metrics.

In a recent case last year involving Marvell Technology Group, the company was charged with pulling in sales from future quarters to close the gap between actual and forecasted revenue. The pull-ins amounted to as much as 16% of the company’s total quarterly revenues, according to the SEC. The company settled for $5.5 million.

Less common but also harder to detect are cases in which revenue recognition is delayed. Companies tend to do this if they’ve already met their revenue targets and want to level out, or smooth, their net income.

How can we at MBG help you!

1. We have dedicated and skilled team to perform revenue audits as part internal audit engagement.
2. IFRS experts specialized in conducting thorough accounting reviews.

Source:

SEC fines Marvell Technology $5.5M in revenue manipulation scheme | CFO Dive