Revenue Recognition Under FRS102 – Part 1 Sale of Goods

Section 23 of FRS102 sets out the standard to be followed when recognising income. An entity should measure revenue at the fair value of the consideration received or receivable. When payment is deferred and the arrangement is a financing transaction then the present value of future receipts should be applied using an appropriate discount rate.

Sale of Goods

An entity should recognise revenue from the sale of goods when the following conditions are satisfied;
  • The entity has transferred the significant risks and rewards of ownership of the goods to the buyer (in most cases, this will result when cash changes hands in exchange for the goods).
  • The entity no longer has continuing managerial involvement to the degree usually associated with ownership.
  • It is probable that economic benefits associated with the transaction will flow to the entity; and
  • The costs incurred or to be incurred in relation to the transaction can be measured reliably.
FRS102 recognises some specific scenarios where revenue should not be recognised;
  • Where the entity retains an obligation for unsatisfactory performance not covered by normal warranties.
  • Where the sale is contingent on another sale happening.
  • Where goods are shipped subject to installation (where installation is a significant part of the sale)
  • Where the buyer has the right to rescind the sale and the entity is uncertain about the probability of this happening.
Despite the above, a sale is still recognised in circumstances where the entity retains title of the goods to protect collectability or where the goods are subject to warranty claims and the entity can estimate the provision reliably.

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