There is different between the way revenue is recognized under US GAAP and under IFRS before the introduction of harmonized accounting standard jointly issued by FASB and IASB.
Under U.S. GAAP, Concepts Statement 6 defines revenue as “inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both) from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations.” Under IFRSs, IAS 18 defines revenue as “the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity when those inflows result in increases in equity, other than increases relating to contributions from equity participants.”
Under U.S. GAAP, FASB Concepts Statement No. 5, Recognition and Measurement in Financial Statements of Business Enterprises, indicates that revenue is recognized when it is realized or realizable and earned. According to paragraph 83 of the IASB’s Framework for the Preparation and Presentation of Financial Statements, revenue is recognized when (1) “it is probable that any future economic benefit” will flow to the entity and (2) such a benefit can be measured reliably. Further, paragraph 93 of the IASB Framework indicates that revenue normally must be earned before it can be recognized.
The adoption of IFRS in Australia brought about the issue of AASB 15 Revenue from contract with the customers. This adoption has changes the method of recognizing revenue on the sales of goods and other services from customers. Apart from the fundamental concept of recognizing revenue, AASB 15 introduced 5 steps in recognizing revenue for the business organization. The introduced steps include”
? Identify the contracts
The AASB 15 provides basic provision to be used in establishing whether there a contract exist between the company and the customers. There are six key criteria to be considered before determining whether contract exists in order to determine the revenue for the company. The criteria includes contract criteria, enforceability, contract term, collectability, combined contract, and not-for-profit consideration (AASB 15. 10)
? Identify the performance obligations
The second step is to identify the performance obligation in the contract. These are promises to transfer distinct goods or services (AASB 15.22). The considerations to be considered under this step are promises in a contract, determining when promises are performance obligations, determining whether goods or services are distinct, series of distinct goods or services, and Not-For-Profit considerations(AASB 15.22).
? Determine the transaction price
The transaction price is referred to as the consideration expected by the seller for the transfer of promised goods or services to the customer. The expected amount may be fixed or variables (AASB 15. 47). The factors to be considered under this include variable consideration and constraining estimates of variable consideration, significant financing component, non-cash consideration, and consideration payable to a customer (AASB 15. 48).
? Allocate the transaction price
Transaction price is allocated to the various performance obligation based on the value relatively to stand-alone selling price once there is identification of performance obligation and determination of transaction price (AASB 15.74). Allocation based on stand-alone selling prices, allocation of a discount, allocation of variable consideration, and NFP considerations are given adequate consideration to under this step (AASB 15.88).
? Recognize revenue upon satisfaction of the obligation
In accordance with the provision of AASB 15 paragraph 31, revenue will be recognized by an entity if the entity has fulfilled a performance obligation by transferring promised goods or services to a customer. Asset will be affirmed to have been transfer when the customer acquires the control of such asset (AASB 15. 31). There are three approaches to be used in recognizing revenue under this step. The approached include control-based revenue recognition approach, performance obligations satisfied over time, and performance obligations satisfied at a point in time (AASB 15. 32)
In accordance with the provision of AASB 15 (105), the party to the contract will show the contract in their respective the financial statement as a contract either asset or contract liabilities after the contract has been performed by each party in relation to the existing relationship between the party (AASB 15. 105).
In accordance with the provision of AASB 15(B49), the non-refundable upfront fee will be recognized as revenue when the future goods or services on which the payment was made for has been transferred. The non-refundable upfront fee is been recognized as advance payment under AASB 15.( AASB 15 . B50). With Alyzac, the upfront non-refundable fee will be regarded and recognized as revenue once the game has been downloaded and virtual goods or consumable has transferred to the customers. This signifies the performance of the obligation because the $10 or $12 after the promotion relate to the allocation of virtual goods or consumable (AASB 15. B50).
For the additional virtual goods to be acquired freely if the customer completed the game within three shall be treated in accordance with the provision of AASB 15 (B40). The revenue will be recognized when such promised goods is transferred and the option is expired.
Revenue model is regarded as a framework in which revenue is generated. It gives a clear picture of revenue to be derived, how to get those revenue and how to pay for the value of the revenue. As a software company, revenue model is appropriate for the Alyzac company.
AASB(2014). AASB 15, Revenue from Contracts with Customers. Australian Accounting Standard Board. Australia.
NSW Government(2017). Guidance for AASB 15 Revenue from Contracts with Customers. Treasury. Australia.