BIM31115 - Tax and accountancy: timing of income and expenditure: GAAP

HMRC officers should refer to an HMRC Advisory Accountant if they have particular queries on the application of UK GAAP or IAS.

The guidance in this chapter refers to FRS 102 Section 23 Revenue.

Related standards under other frameworks are:

FRS 105 Section 18 Revenue

IAS: IFRS 15 Revenue from Contracts with Customers

Old UK GAAP: FRS 5 Reporting the Substance of Transactions – Application Note G Revenue Recognition

FRS 102 Section 23 sets out the following basic principles for revenue recognition:

  • Revenue should be measured at the fair value of the consideration received or receivable.
  • Revenue from the sale of goods should be recognised when the significant risks and rewards of ownership have been transferred to the buyer which in most, but not all, cases coincides with the transfer of legal title or possession.
  • Revenue from the rendering of services and from construction contracts is recognised with reference to the stage of completion of the transaction at the end of the reporting period (where the outcome can be estimated reliably).

In effect these principles embody the principle that income is recognised as it is earned. This is when goods are delivered or services are provided. This is easy to recognise when it is a simple retail sale but more complex or lengthy transactions may not be straightforward. In general terms, if the entity does not have to carry out any more actions to earn the revenue the income should be recognised. However this may not be the case, for example, where sales have been made on a right of return basis, or goods have been provided subject to satisfactory installation and performance.

Under IFRS 15, the core principle is that an entity shall recognise revenue to depict the transfer of promised goods or services to customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

IFRS 15 requires entities to apply a five-step approach i.e.

1. Identify the contract(s) with the customer.

2. Identify the performance obligations in the contract

3. Determine the transaction price

4. Allocate the transaction price

5. Recognise revenue when or as a performance obligation is satisfied.

Each case must be considered on its individual facts and, where necessary, advice should be sought from an HMRC Advisory Accountant.