When realizing sales in accordance with IFRS 15, the principle of matching sales revenue with the associated expenses incurred to achieve them always prevails. It is therefore interesting to see to what extent the expenses of a company are included in the balance sheet. In the case of IFRS as well as the HGB, an activation of the acquisition costs or costs of capital can be implemented. subdivide the production costs or a direct identification of the effort.

IFRS 15 now provides for a five-step process for recording revenue. The procedure often plays a special role in multi-component contracts, because in these situations, relative individual prices and total prices as well as the timing of delivery and payment are usually different. Therefore, the consideration of the proper accounting of revenues for an accrual-based presentation of revenues and expenses and thus a realistic presentation of the assets and earnings situation is interesting. In addition, this is also relevant in auditing as part of a statutory audit and should therefore be properly recorded. If you want to know to what extent you avoid the audit, you can contact us.

Under the International Financial Reporting Standards (IFRS), the realization of revenues must comply with IFRS 15. This Standard replaces the previously existing IAS 11 and IAS 18, which dealt with revenue recognition in a significant way. The distinction between IFRS and IAS is solely due to the fact that the newer standards issued by the IASB (International Accounting Standards Board) since 2001 are called IFRS. The IASB is made up of legal experts from different countries.

The principle of revenue realization mentions the time of transfer of goods and services to the customer as a decisive realization criterion. The amount depends on the expected consideration, since this takes place only later. By comparing expenses and revenues used for performance measurement, it is possible to recognise performance and return directly and faithfully on an accrual basis. The accruals and general principles of IFRS are discussed in more detail below.

In accordance with the principle of fair presentation, the assets, financial and earnings situation as well as the investment income of a company should be accurately represented. Accordingly, it is also necessary on the one hand to show exactly when and to what extent the sales revenues were incurred, on the other hand it is also necessary to provide a correct identification of the associated sales tax or for you as an entrepreneur of the input tax deduction. It is also important to note special cases, such as an accumulation of sales tax when converting the company. We are happy to help if you have any questions.

According to the go concern principle, the valuation of revenues must be based on continuation values.

According to the accruals concept, transactions must be recorded continuously over the contract period, provided that any production or service provision takes place over several periods. In particular, it is important to consider the factual relationship between performance progress and revenue. As a result, an even and predictable accounting of the revenue corresponding to the cost incurred is sought. Otherwise, a company that, for example, only produces long-term production, initially regularly realizes losses until it comes to the conclusion of an order (i.e. the time of completion) and thus a jump in costs.

In particular, two different methods for recognizing investment expenditure must be considered. On the one hand, IFRSs know the so-called Capitalize model and on the other hand the full expense model. The latter classifies expenses without activation directly as operating expenses, which accordingly assumes only a benefit over only one period of acquisition. On the subject of the deduction of operating expenses in the context of foreign licence fees, we have designed interesting tax arrangements in order to avoid withholding tax. On the other hand, the capitalize or CapEx model is expected to activate the acquisition costs or production costs and scheduled (amortization or depreciation) and non-scheduled (impairment or write-down) depreciations in subsequent periods after the acquisition. In the case:

First of all, the customer contract or identify the customer contracts, with a further five characteristics to be observed.

First of all, the legal binding of the contract must be ensured. To ensure this, the approval by all contractual partners is the first requirement. In addition, an identification of the rights of the customer and the payment obligation is possible. In addition, the receipt of the consideration must be classified as sufficiently likely. Finally, the contract must be checked for its economic substance, so that no round trip sales, i.e. sales triangles in which the same goods and services are simply sold in a circle, count.

In the second step, separate performance obligations must be identified. For this, an independent demarcation of these is indispensable. Thus, there is an obligation unit if the benefit criterion and the separation criterion are each fulfilled. The benefit criterion is met if the customer benefits from the goods or services directly or in connection with other resources. Furthermore, the separation criterion is met if the customer can separate the performance obligation from other obligations contained in the contract.

Here is the expected consideration which the customer is likely to provide, provided that he receives the goods or service. This can consist of fixed and variable parts, wherein either the expected value or the most probable value is used for the variable consideration. As a rule, the sum agreed in the contract applies to this determination. Thus, this is also the only reliable source for determining the transaction price and any other offers of a company or other prices are irrelevant for this contractual relationship.

Now that the performance obligations and the total price of the contract have been determined, the proportional division between the individual performance obligations follows. However, it should be noted that the ratio of the relative individual selling prices must be respected.

Example:

Single price mobile phone: 600 €; Single price Mobile contract: 40 € / month for two years = 960 €

Total price of the two performance obligations for separate purchase: €1,560; transaction price for both performance obligations together: €1,380

Calculation of the relative retail prices:

€600 / €1,560 ~ 0.3846 * €1,380 = €530.77

960 € / 1,560 € ~ 0,6153 * 1,380 € = 849.23 € / 24 = 35.38 € monthly

For the determination of the transfer of control, a distinction must be made in particular between a time-related and a time-related transfer of the performance obligation. However, only the criteria for a period-based transition are examined, if they are not fulfilled, the transition is time-related. Revenue is realised at the moment when, in accordance with IFRS 15.31, the performance obligation is fulfilled by transferring a good or a promised service. In this case, the performance obligation is deemed to be satisfied once the customer acquires control of the asset.

Now there are three criteria that define a time-related realization. First of all, a period-related implementation occurs, provided the customer receives the service and at the same time benefits from it. In addition, when the company creates or improves an asset, which the customer already controls, there is also a time-related transition. Finally, such a customer-specific asset that the entity is entitled to services that have already been provided also represents a period-based revenue recognition in accordance with IFRS 15.

Unless one of these arguments is met, there is a time-related transition. This depends on indicators, such as acceptance by the customer or the transition of opportunities and risks, a well-founded right of ownership or a transfer of ownership from the customer and a current payment entitlement of the company. However, if a payment entitlement is accompanied by subsequent deliveries, or has been agreed, from a balance sheet perspective only an active contract item arises instead of a claim against the customer.

Now the question often arises in international accounting whether temporary differences lead to the application of deferred taxes. However, the business environment and the type of activity often play an important role. A prominent example of how deferred taxes are definitely recognised has been leased items since 2019, as the IASB now imposes an obligation to account for leased items with the lessee.

To sum up, a proper presentation of the assets, income and financial position is very often linked to the accounting for revenue. In doing so, it is important to delineate periodically in order to ensure a plannable and continuous presentation of success and return. This is particularly challenging for complex long-term manufacturing and multi-component contracts, as payments can vary greatly from deliveries. If you have questions about the determination of turnover and the allocation of expenses, you can contact us.