Receivables and Revenue

As they are financial assets, if, just for fun, one asks an AI robot about receivables, one may get this answer.

Nice to know, but not particularly useful if one wants to account for a credit sale to a customer.

So, if one is actually referring to claims to cash arising from contracts with customers tied to the delivery of goods or rendering of services, one is better off using terms such as trade accounts, trade receivables, accounts receivable or, if one wants to be extra pedantic, trade accounts receivable.

While receivables are usually claims against third parties, at larger entities they may represent claims against subsidiaries, affiliates or other entities in a group (e.g. joint venture or joint operation).

While these receivables should be recognized and measured in the same way as third-party receivables, they are eliminated in consolidation (even though they may be reported in individual financial reports)

As keeping track of these items is important, the COAs on this page have a separate section devoted specifically to intercompany transactions and balances.

As such, this page addresses both the accounting for receivables and revenue recognition simultaneously.

With respect to revenue recognition, the two key issues are timing and amount.

Both of these are discussed on this page.

However, as the timing of revenue recognition coincides with the timing of inventory derecognition, an additional discussion of this issue is provided on the inventory page.

The distinguishing feature, while receivables are "unconditional," contract assets are not.

Depending on perspective, this statement is either clear or misleading.

As stated in IFRS 15.108 | ASC 606-10-45-4 (edited): a right to consideration is unconditional if only the passage of time is required before payment of that consideration is due.

So there actually is a condition involved. With a receivable, the vendor can sell to a customer under the condition that they give the customer some time to remit payment.

Obviously, not all vendors are willing to submit to this condition and only sell to customers able and willing to pay cash on delivery.

IFRS 15 | ASC 606 distinguishes between receivables (above) and contract assets in that IFRS 15.107 | ASC 606-10-45-7 (edited, emphasis added) states: If an entity performs by transferring goods or services to a customer before the customer pays consideration or before payment is due, the entity shall present the contract as a contract asset..."

When introduced, this guidance caused some confusion. For example, one of our clients called in a panic because his company accounted for projects using percentage-of-completion (specifically cost-to-cost) accounting, and accounts such as contract in progress, billings, and recognized income. The new standard, however, required over time and contract assets. This would require a complete redesign of their accounts and hundreds, if not thousands, of man-hours.

Grr. Arg.

Fortunately, IFRS 15 | ASC 606 did not change POC accounting, just described it using updated terminology.

Thus, a "contract asset" is the difference between the contract in progress account(s) (including recognized income) and the billings account(s), if the difference is positive. If the difference is negative, a deferred revenue liability is reported instead.

Why did IFRS 15 | ASC 606 not say so in the first place?

Where is the fun in that?

Trade receivables and revenue are inextricably linked. As the latter is significantly more important to financial statement users, the primary guidance for receivables comes from IFRS 15 not IFRS 9. Similarly, in US GAAP, it is ASC 606, even though receivables have their own, stand-alone topic (ASC 310).

This also implies, it is not possible to discuss receivables without, at the same time, discussing revenue recognition, both its timing and amount. As a corollary, revenue recognition, inventory derecognition and cost of sales are also intertwined. For this reason, the next page not only discusses these two issues, but also includes a section on revenue recognition timing.

Same facts except the customer paid with a credit card. Credit card sales clear in two days.

Same facts except the customer paid with a debit card. Debit cards are subject to lower charges and clear the same day. XYZ uses a separate bank account (#123) for debit card sales.