Invoicing and Revenue, Same Same but Different ?
A business owner once mentioned that one of the most enjoyable moment in running a business is to issue invoices out as every invoice printed goes directly into the books in the form of revenue. He issues invoices to bill customers for services performed, products delivered as well as collection for advance payment upon order confirmation. Interestingly, in accounting not all revenue is recognised as income, and where it relates to advance payment, it is recorded as a customer deposit, a liability in balance sheet. It may seem that determining a billing as revenue is as simple as it is, but it is not always the case.
Under the old revenue guiding principle (FRS18 or SFRS(I)15 which is valid till 1 January 2018), a billing is recognised as revenue when there is a transfer of significant risks and rewards of ownership to the customers. A completely new concept of revenue recognition under FRS115 takes effect from 1 Jan 2018 and impacting all current accounting reporting in 2019, covering all financials beginning on or after 1 January 2018. Beside the introduction of the concept of the transfer of control, all transactions must be assessed under a prescriptive five step revenue assessment model to establish the critical parameters of contracts, performance obligations, transaction price etc before any financials can gets into the revenue line. The most significant part of this new revenue principle is that it will potentially will defer all revenue previously reported under progressive completion to further down the road until when the transaction is completed and handed over to the customer. That means what you used to take in as revenue previously will no longer be allowed and it only gets into the books when you complete the whole transaction with the transfer of control to the customer. In addition, a one-time assessment for earlier revenue for contracts that have commenced on or even before the beginning of financial year will need to be adjusted either through the retained earning (‘modified retrospective approach’) or a restatement of the last financial year. Businesses most impacted by this new revenue standard are the construction industry, renovation, IT or services businesses that have traditionally priced contracts with progressive billings with milestones or efforts expended to date. Businesses that bundled commercial maintenance or warranty that are available as separate off-the-shelf items from straight hardware sales are also impacted as these time elapse contracts will need to be separately stripped and recognised over time.