Revenue: APSE 3400 Income Statement

Updated: Sep 2, 2019

TIP: For those who are writing the Canadian CPA board exams (CFE exams), Revenue recognition is an extremely important topic and is always found on the exam.


Revenue is found on the Income Statement (ASPE). Revenues are income that arise from ordinary activities such as: sales, fees, interest, and royalties.


An excerpt from the Income Statement, below, shows where and how Revenue is presented.


Operating Revenue includes Revenues that are brought in from regular operating activities. Other Revenue includes Revenues that are brought into the company by means other than regular operations. For example, companies may earn Revenues through interest earnings, leasing extra office space, etc.. As long as these earnings are not part of their regular business operations, they will be considered Other Revenue. Revenue and Other Revenue are treated the same for accounting purposes. The difference is simply a matter of labeling. For the purposes of this post, I am using the term "Revenue" to refer to both Revenue and Other Revenue - they are interchangeable.


Revenue recognition can be a lengthy process. In general, there are three steps associated with Revenue recognition. Note that these general steps are the same for both IFRS and ASPE. However, the detailed of each step will be different.

  1. Determine whether or not the transaction should be considered Revenue. In some cases a transaction should be considered a Gain, and not Revenue. It is therefore important to first establish whether the transaction is considered Revenue.

  2. Determine when the Revenue should be recognized.

  3. Finally - determine how much Revenue should be recognized.

TIP: When recognizing Revenue, it is often best to step through the paragraphs in the ASPE criteria one at a time, in the order in which they are presented, to ensure that you correctly apply each of the principles. If you are a Canadian (aspiring) CPA, these criteria can be found in your CPA Handbook -> Accounting Standards for Private Enterprises -> ASPE 3400, and do not need to be memorized. You can simply refer to (and cut and paste) them from your handbook. This post will review the steps in detail.


Should the transaction be considered Revenue?


ASPE 3400.04 defines revenue as being "the inflow of cash, receivables or other consideration arising in the course of the ordinary activities of an enterprise, normally from the sale of goods, the rendering of services, and the use by others of enterprise resources yielding interest, royalties and dividends."


If the transaction falls under one of the categories mentioned above, then we can safely consider the transaction as Revenue.


When should the transaction be recognized?


Revenues are recognized when certain performance obligations are met. ASPE 3400.05 outlines these performance obligations. Both of the following performance criteria must be met in order to recognized revenue:

  • Risks and rewards of ownership must have been transferred to the buyer. This means that the seller cannot have any continuing managerial involvement or have control over the goods transferred. AND

  • There needs to be reasonable assurance that the buyer will pay, and the amount of consideration should be clearly defined.

Additional performance obligations that need to be met under ASPE 3400.07 include:

  • an arrangement exists; AND

  • the goods have been delivered/services have been rendered; AND

  • the price is fixed or easily determined


Completed Contract and Percentage Completed Methods


When entities have long-term contracts or render ongoing services to customers, Revenue should be recognized using either the Completed Contract or Percentage Completed methods.


Completed Contract Method: Revenue is only recognized when all or substantially all of the work on the contract is complete. This method can be used to simplify tracking expenses and progress, for accounting purposes.


Percentage of Completion Method: Revenue is recognized as a percentage of work that has been completed. This method is often used for long term construction contracts. One issue with this method is that it is not immediately clear how to determine how complete the project is (the percentage completion). We will review, in more detail, how to determine percentage completion in a later article.


You will notice that the IFRS Revenue article made no mention of two different methods for long-term contracts. This is because IFRS bans the use of Completed Contract Method. This method only exists to simplify accounting for private enterprises. However, if the company is reporting under IFRS, they must use the Percentage of Completion Method. This method is described in the IFRS critera, but is not labelled "Percentage of Completion Method". However, it is indeed the same method that is described in this post.


Multiple Items


ASPE 3400.11 outlines that when there are bundled deliverables, each component should be recognized separately and the Revenue recognition criteria should be applied to each separate component.


How to measure the Revenue Recognized?


ASPE 3400.04 and 3400.23 state that when presenting Revenue, the following should be netted from the Revenue amount:

  • trade discounts

  • volume discounts

  • returns and allowances

  • claims for damaged goods

  • certain excise and sales taxes

  • any amount collected on behalf of a third party


Summary


This concludes our article on Revenue recognition. It is a long process, and so we have created a summary of steps which can be found below.


1. Demonstrate that the transaction meets the definition of Revenue:

Explain why the transaction falls with the definition, using ASPE 3400.04.


2. Explain when the transaction should be recognized:

Demonstrate that the transaction meets the Performance obligations under ASPE 3400.05-3400.07.


3. Explain how to measure the Revenue recognized:

Refer to ASPE 3400.04 and 3400.23 to justify how much should be recognized.


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