Transactions Exchange Revenue From
Transcript of Transactions Exchange Revenue From
ACCOUNTING GUIDELINE
GRAP 9
Revenue From
Exchange
Transactions
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Note that this document is not part of the GRAP standard. The GRAP takes precedence while this guideline is used mainly to provide further
explanations on the concepts already in the GRAP.
GRAP 9 on Revenue from Exchange Transactions
Issued February 2020 Page 3 of 25
Contents
1. Introduction .................................................................................................................. 4
2. Scope .......................................................................................................................... 5
3. Distinguishing between exchange and non-exchange transactions .............................. 5
4. Definition and Identification .......................................................................................... 5
5. Recognition of Revenue ............................................................................................... 6
5.1 Applying the probability test on initial recognition of revenue .............................. 6
5.2 Non-refundable transactions ............................................................................... 7
5.3 Identification of transactions ................................................................................ 8
5.4 Specific recognition criteria ............................................................................... 10
6. Measurement of Revenue .......................................................................................... 13
6.1 When inflow of cash and cash equivalents is deferred ...................................... 13
6.2 Measurement of revenue arising from statutory (non-contractual arrangements) ......................................................................................................................... 14
6.3 Exchange of goods and services ...................................................................... 15
6.4 Discounts, rebates and customer incentives ..................................................... 16
7. Rendering of Services ................................................................................................ 18
7.1 Stage of completion .......................................................................................... 18
7.2 Estimated outcome of transaction ..................................................................... 19
8. Sale of Goods ............................................................................................................ 19
8.1 Significant risk and rewards of ownership ......................................................... 19
8.2 Significant performance obligations .................................................................. 20
9. Interest, Royalties and Dividends or Similar Distributions ........................................... 21
10. Entity Specific Guidance ............................................................................................ 22
11. Useful links and references ........................................................................................ 24
GRAP 9 on Revenue from Exchange Transactions
Issued February 2020 Page 4 of 25
1. Introduction
This document provides guidance on the accounting treatment of revenue from exchange
transactions.
The contents should be read in conjunction with GRAP 9.
For purposes of this guide, “entities” refer to the following bodies to which the standard of
GRAP relate to, unless specifically stated otherwise:
Public entities
Constitutional institutions
Municipalities and all other entities under their control
Trading entities and government components applying the standards of GRAP
Parliament and the provincial legislatures
TVET and CET colleges
Explanation of images used in manual:
Definition
Take note
Management process and decision making
Example
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Cash R1 000 Cash R1 000
Cash, goods or services R1 000
2. Scope
GRAP 9 is applicable to all entities preparing their financial statements on the accrual basis of
accounting in accounting for revenue from the sale of goods, rendering of services, interest,
royalties and dividends or similar distributions.
3. Distinguishing between exchange and non-exchange transactions
Exchange
Non-Exchange
4. Definition and Identification
Revenue includes only the gross inflow of economic benefits or service potential that are
received or receivable by the entity on its own account. Accordingly revenue is not intended
to include amounts collected on behalf of others. GRAP 109 on Accounting by Principals and
Agents provides further explanations on the recognition, measurement and disclosure
requirements in this regard.
An exchange transaction is one in which the entity receives assets or services or services, or has liabilities extinguished, and directly gives approximately equal value (primarily in the form of goods, services or use of assets) to the other party in exchange.
Therefore an exchange transaction is between two parties giving and/or receiving assets/services, etc. for the same value.
Non-exchange transactions are transactions that are not exchange transactions. In a non-exchange transaction, an entity either receives value from another entity without directly giving approximately equal value in exchange, or gives value to another entity without directly receiving approximately equal value in exchange.
The definition of non-exchange refers to “value” which in the definition of exchange transactions refers to cash, goods, services or use of assets. The “value” derived from the transaction is not the achievement of service delivery objectives, but rather the receipt of assets, services etc.
Revenue is the gross inflow of economic benefits or service potential during the reporting period when those inflows result in an increase in net assets, other than increases relating to contributions from owners.
Goods & Services R1 000
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Identifying revenue transaction is often not straightforward, as the underlying arrangement can
be challenging to understand and interpret. Accordingly an entity should assess the substance
of the transaction and not only the legal form. The substance is not based only on the
transaction’s visible economic effect; it will also have to be analysed based on all contractual
or statutory terms, any side letters or oral agreements or past practices. Only once the
transactions has been properly understood can the question of when and how much revenue
to recognise be addressed.
5. Recognition of Revenue
Revenue is recognised only when:
It is probable that economic benefits or service potential will flow to the entity; and
These benefits can be measured reliably.
Example: Recognition of Revenue
Entity A has delivered services to Entity B before the reporting date, however at reporting date Entity A has not yet invoiced Entity B for the service delivered. Entity A knows that the invoice would be for R120,000.
At reporting date it is probable that Entity B will pay for the services delivered by Entity A, thus it is probable that economic benefits will flow to Entity A. Entity A can measure this benefit reliably at R120,000 and therefore Entity A should recognise the revenue in respect of the services delivered to Entity B, even if the invoice has not yet been issued at reporting date.
Journal entry at reporting date in the records of Entity A:
Debit Credit
R R
Receivables 120,000
Revenue 120,000
Where revenue has been recognised, but the cash has not been received, a receivable will
be included as a financial asset / statutory receivable in the statement of financial position.
5.1 Applying the probability test on initial recognition of revenue
One of the conditions for the recognition of revenue is the probability of an inflow of economic
benefits or service potential to the entity. In the past, entities applied various practices in
assessing the probability of revenue collection resulting in inconsistent reporting on initial
recognition and/or at the end of the financial year.
IGRAP 1 on Applying the Probability Test on Initial Recognition of Revenue clarifies that at
the time of initial recognition of revenue it is not appropriate to assume that revenue will not
GRAP 9 on Revenue from Exchange Transactions
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be collected and therefore the full amount of revenue should be recognised at the initial
transaction date.
5.2 Non-refundable transactions
When services are being delivered over a period of time and the agreement includes a clause
stipulating that the fee payable is non-refundable, the entity should defer the revenue to be
recognised, therefore the revenue will be recognised based on a percentage of completion
basis (or other method as appropriate). The revenue should be recognised in surplus and
deficit as the service is provided.
When revenue is deferred because services are being delivered over a period of time and the
agreement includes a clause stipulating that the fee is not refundable on cancellation of the
contract, then on cancellation of the contract all deferred revenue for that contract is
recognised as revenue immediately.
Example: Non-refundable revenue
Members pay an annual fee in order for Entity A to provide services to them such as assisting in problems identified, issuing of membership numbers, etc. This service delivery is part of the mandate of the entity. The cost is as follows:
Annual fee = R6,000 (non-refundable) to be paid upfront; and
No additional monthly fee is charged.
During the reporting period 1 member paid the fee on the 1st of June 20X7 (as this was when he/she joined) and 5 members paid their fees on the 1st of October 20X7 (as this was when they joined). However, with effect from 1 January 20x8 the member who joined in June 20X7 cancelled the contract. The reporting date for Entity A is 31 March 20X8.
The revenue should be recognised over the period of the services being delivered which is 12 months (1 year).
Entity A provides public goods and services to private households. Entity A bills individual households on a monthly basis for goods provided and services rendered. Entity A estimates, based on past experience, that only 90 percent of the revenues will be collected. Entity A recognises the full amount of revenue base on the terms of the arrangement with each household, notwithstanding its knowledge based on past experience. Consideration should be given to whether there is objective evidence that an impairment loss has been incurred when making the impairment assessment for subsequent measurement of receivables at the reporting date.
The nature of revenue does not change just because the service has not been delivered. If the revenue would have been recognised as revenue from exchange transactions - services delivered (in accordance with GRAP 9), the revenue immediately recognised due to cancellation of services will also be recognised as revenue from exchange transactions - services delivered (in accordance with GRAP 9).
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Revenue to be recognised before cancellation of the contract by one member:
1 x R6,000 x 7/12 = R3,500 (1 June – 31 Dec)
5 x R6,000 x 6/12 = R15,000 (1 Oct – 31 March)
Total revenue = R18,500
In addition to this, revenue should be recognised, for non-refundable amounts, for all deferred revenue (revenue received in advance) when the service has been cancelled.
All deferred revenue to be recognised for the member who cancelled the contract as from 1 January 20X8 is R2,500 (R6,000 – R3,500).
The journal entries for the reporting period will be as follows:
1 June 20X7 Debit Credit
R R
Bank 6,000
Deferred revenue (revenue received in advance) 6,000
1 October 20X7 Debit Credit
R R
Bank (R6,000 x 5) 30,000
Deferred revenue (revenue received in advance) 30,000
31 March 20X8 Debit Credit
R R
Deferred revenue (income received in advance) 18,500
Revenue 18,500
Deferred revenue (income received in advance) 2,500
Revenue 2,500
5.3 Identification of transactions
The recognition criteria are applied to each individual transaction separately. However, there
are circumstances where a single transaction has more than one identifiable component. In
these instances the recognition criteria should be applied to each component separately.
Example: Single transaction with components
An entity advertised a machine to the public for R5,000 with a free two year service plan. However, for the entity, the selling prices consist of R4,520 for the actual machine and R480
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for the two year service plan. The entity sold one machine on 1 January 20X8. Reporting date is 31 March 20X8.
This single transaction has two components:
Selling of the machine for R4,520; and
A two year service plan for R480.
The entity should recognise these transactions separately. The revenue for the selling of the machine should be recognised immediately and the revenue for the service plan should be recognised over the period of the service plan.
The journal entry will be as follows:
31 March 20X8 Debit Credit
R R
Bank or receivables 5,000
Revenue 4,520
Revenue (R480 / 24 months x 3 months) 60
Deferred revenue (R480 / 24 months x 21 months) 420
Deferred revenue will be recognised as a liability in the statement of financial position.
The recognition criteria may also be applied to two or more transactions together. This can
only be done if the transactions are linked in such a way that the effect of one transaction
cannot be understood without reference to the other transaction or series of transactions.
Example: Linked transactions
An entity enters into a transaction on 1 May 20X8 to sell goods to the value of R10,000 to Company B. The entity then enters into a separate agreement with Company B to buy back the goods on 1 June 20X8 for R10,200. Reporting date is 30 June 20X8.
As the second transaction negates the effect of the first transaction, these transactions should be viewed as a single transaction to reflect the true substance of the agreements. As such the two transactions should be dealt with together as a unit.
The journal entry will be as follows:
1 May 20X8 Debit Credit
R R
Loss on sale of goods 200
Payables (R10,000 – R10,200) 200
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5.4 Specific recognition criteria
When identifying transactions, the recognition criteria need to be considered depending on the specific circumstances of a transaction. Revenue
recognition criteria applied to a transaction is dependent on the revenue category. Each revenue category should comply with the general
recognition criteria plus the specific recognition criteria applicable to each revenue category. These revenue recognition criteria are summarised
below:
Revenue categories
Rendering of services Sale of goods Interest, royalties and dividends
Genera
l
revenu
e
recognitio
n
crite
ria
app
licab
le t
o
all
revenu
e
cate
gori
es It must be probable that economic
benefits or service potential associated with the transaction will flow to the entity; and
It must be probable that economic benefits or service potential associated with the transaction will flow to the entity; and
It must be probable that economic benefits or service potential associated with the transaction will flow to the entity; and
The revenue can be measured reliably The revenue can be measured reliably The revenue can be measured reliably
Specific
recog
nitio
n c
rite
ria p
er
revenu
e
cate
gory
Stage of completion of the transaction at the reporting date can be measured reliably; and
Significant risk and rewards of ownership of the goods have been transferred to the purchaser;
Interest is recognised using the effective interest rate method as set out in GRAP 104 on Financial Instruments
With regard to statutory receivables, interest is recognised using the cost method as set out in GRAP 108 on Statutory Receivables
Cost incurred and the cost to complete the transaction can be measured reliably.
Cost incurred and the cost to complete the transaction can be measured reliably; and
Royalties are recognised as they are earned in accordance with the substance of the relevant agreement.
The seller retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold.
Dividends or similar distributions are recognised when the owner’s or the entity’s right to receive payment is established.
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Issued February 2020 Page 11 of 25
Decision tree for recognition of services rendered:
RENDERING OF SERVICES
measured at fair value
Have the parties agreed on:
enforceable rights of each party;
consideration; conditions of
settlement
Recognition criteria met
Y
Recognise revenue to
degree which recognised
expenses are recoverable
N
INITIAL RECOGNITION AND MEASUREMENT
Recognise revenue with reference to the stage of completion
Y
Defer revenue recognition and
recognise consideration
already received as a
liability
N
Uncertainty over the
collectability of amounts
recognised
Calculate impairment
loss
Do nothing
SUBSEQUENT MEASUREMENT
Y
N
Refer to:
GRAP 104 on Financial Instruments or
GRAP 108 on Statutory Receivables
GRAP 9 on Revenue from Exchange Transactions
Issued February 2020 Page 12 of 25
Decision tree for recognition of sale of goods:
SALE OF GOODS
measured at fair value
Where significant risks and rewards of ownership transferred to the
buyer?
Instances where not transferred: Seller retains obligation for
unsatisfactory service; Revenue for seller dependent
on revenue earned by the buyer;
Goods are shipped and needs to be installed, which is a significant part of the contract;
Purchaser has the right to cancel purchase, for reasons stipulated in contract and seller is uncertain about probability of return.
Recognition criteria met
Y
Defer revenue recognition and
recognise consideration
already received as a
liability
N
INITIAL RECOGNITION AND MEASUREMENT
Recognise revenue
Y
Defer revenue recognition and
recognise consideration
already received as a
liability
N
Uncertainty over the
collectability of amounts
recognised
Calculate impairment
loss
Do nothing
SUBSEQUENT MEASUREMENT
Y
N
Refer to:
GRAP 104 on Financial Instruments or
GRAP 108 on Statutory Receivables
GRAP 9 on Revenue from Exchange Transactions
Issued February 2020 Page 13 of 25
6. Measurement of Revenue
The amount of revenue arising from a transaction (which is contractual in nature) is usually
determined by the agreement between the two parties. It should be measured at the fair value
of the consideration received or receivable after taking into account any trade discounts and
volume rebates.
Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.
6.1 When inflow of cash and cash equivalents is deferred
When the inflow of cash and cash equivalents is deferred then the fair value of the goods or
service may be less than the actual cash received or receivable, as the agreement effectively
represents a financing transaction. In these instances the fair value of the transaction is
determined by discounting all future receipts using an imputed rate of interest.
The imputed rate of interest is usually either:
The prevailing rate for a similar instrument of an issuer with a similar credit rating (the rate
the same customer will be charged for purchasing the same goods from another supplier);
or
A rate of interest that discounts the nominal amount of the instrument to the current cash
sales prices of the goods or services.
The difference between the fair value and the nominal amount (actual cash received or
receivable) is recognised as interest revenue in accordance with GRAP 104 on Financial
Instruments.
Example: Deferred settlement terms
The Entity A provides services to Entity B. The services are invoiced for R1,500 and the payment is due in 90 days from invoice date. Invoice date is 15 June 20X8. Normal credit terms for this type of service are 30 days. Entity A does not charge Entity B any interest; however the transaction is in substance a financing transaction due to the payment being deferred beyond normal credit terms. Assume that the client would have paid 9% interest for 90 days payment terms if the client obtained the service from another supplier. Reporting date is 30 June 20X8.
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Journal entry at transaction date:
At the transaction date Entity A should record revenue at the fair value.
15 June 20x8 Debit Credit
R R
Receivable 1,478
Revenue (R1,500 / (1 + (9% / 365 days)) 60days ) 1,478
Thus the difference between the fair value (R1,478) and the nominal amount (R1,500) is interest (R22). This interest is recognised over the deferred payment term, which in this example is 60 days (90 days payment less 30 days normal terms).
At reporting date:
15 days has lapsed since transaction date which is still within the 30 days normal credit term period thus no interest is recognised at reporting date.
Journal entries after reporting date:
30 days has lapsed after the 30 days normal credit term period. Normal credit term period ended 15 July 20X8. Interest should be recognised as follows:
14 August 20X8 Debit Credit
R R
Receivable 11
Interest (R1,478 x (9% / 365 days) x 30 days) 11
60 days has lapsed after the 30 day normal credit term and 30 days has lapsed since interest was last recognised. Interest should now be recognised as follows:
13 September 20X8 Debit Credit
R R
Receivable 11
Interest ((R1,478 + R11) x (9% / 365 days) x 30 days) 11
Total interest earned for the 60 day period exceeding normal credit terms is R22 (R11 + R11).
6.2 Measurement of revenue arising from statutory (non-contractual arrangements)
The amount of revenue arising from a transaction which is statutory (non-contractual) in nature
is usually measured by reference to the relevant legislation, regulation or similar means. The
fee structure, tariffs or calculation basis specified in legislation, regulation or similar means is
used to determine the amount of revenue that should be recognised. This amount represents
the fair value, on initial measurement, of the consideration received or receivable for revenue
that arises from a statutory (non-contractual) arrangement. See GRAP 108 on Statutory
Receivables.
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Issued February 2020 Page 15 of 25
6.3 Exchange of goods and services
Goods and services can be exchanged for other goods and services instead of for cash and
cash equivalents, or the exchange can be for a combination of goods and service and cash
and cash equivalents. This exchange of goods and services is usually done in two basic ways.
One is where goods and service are exchange for similar goods and service and two is where
it is exchanged for dissimilar good and services.
Where goods and service are exchanged for goods and services of a similar nature and value,
the exchange is not regarded as a transaction that generates revenue. No transaction is
recorded.
Where goods and service are exchange for goods and service of a dissimilar nature, the
exchange is regarded as a transaction that generates revenue. In these transactions, revenue
is measured at the fair value of the goods or service received. When the fair value of goods
or service received cannot be measured reliably, revenue is measured at the fair value of
goods and services given up. An adjustment should be made to the fair value for any cash
and cash equivalents also payable in respect of these transactions.
Example: Exchange of dissimilar goods or services
Entity A falls under the Department of Arts and Culture and provides shows to the public on a regular basis, they also provide transportation for those attendees that do not have transport to the show. Entity A’s large mini-bus is in for repairs and they need a vehicle to provide transportation to a few attendees that will be coming to show. Entity B, the business next door, rents out mini-busses and other vehicles. Entity A approaches Entity B with the following proposal: Entity A will rent a mini-bus from Entity B for R1,200 (which is market related) but instead of paying cash Entity A will provide tickets for the show which can be attended by Entity B to the value of R1,200. The reporting period for both entities is 31 March 20X8.
There is an exchange of goods and services between Entity A and Entity B which is dissimilar in nature i.e. show tickets (R1,200) for the rental of a mini-bus (R1,200). Revenue should be recognised by Entity B at the fair value of the services receivable.
Records of Entity A
Rental expense for mini-bus.
Debit Credit
R R
Rental expense 1,200
Payable (Entity B) 1,200
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Tickets given to Entity B to attend a show.
Debit Credit
R R
Payable (Entity B) 1,200
Revenue 1,200
Records of Entity B
Rental income for mini-bus.
Debit Credit
R R
Receivable (Entity A) 1,200
Rental income 1,200
Paying for the tickets.
Debit Credit
R R
General expenses 1,200
Receivable (Entity A) 1,200
6.4 Discounts, rebates and customer incentives
In certain instances an entity may provide discounts or rebates if a customer buys a certain
quantity or value of goods. When it is probable that this discount or rebate will be granted and
can be measured reliably, then the rebate or discount is recognised as a reduction of revenue.
Example: Discount or rebate
Entity B purchased 500 boxes of paper from Entity A at R300 a box. Entity B received a 7.5% trade discount due to the large quantity purchased.
Records of Entity A at transaction date
Revenue that Entity A would recognise (before taking into account discounts) is R150, 000 (500 boxes x R300 per box). Trade discount is R11,250 (500 boxes x (R300 x 7.5%)). However revenue should be recognised net of discounts or rebates and therefore the revenue to be recognised is R138,750 (R150, 000 – R11,250).
GRAP 9 on Revenue from Exchange Transactions
Issued February 2020 Page 17 of 25
The journal entry will be as follows:
Debit Credit
R R
Receivable 138,750
Revenue (500 x R300) - ((500 x (R300 x 7.5%)) 138,750
In some cases entities provide incentives and in most instances it is in the form of an early
settlement discount. For example, Entity B will receive 2.5% discount on its account if it pays
within 7 days of invoice date. These incentives should be estimated at the date of transaction
and should be deducted directly from revenue. The reason for deducting it from revenue is
that the fair value of the receivable should be recognised.
Example: Incentives
Entity B purchased 500 boxes of paper from Entity A at R300 a box. Entity B received a 7.5% trade discount due to the large quantity purchased. Entity A will provide an additional 2.5% settlement discount if Entity B pays within 7 days of invoice date.
Entity A should estimate at transaction date whether Entity B will make use of the settlement discount offer. Entity A will base this on the payment history of Entity B.
Records of Entity A at transaction date
Revenue before discount or incentive that Entity A would recognise is R150,000 (500 boxes x R300 per box).
Trade discount is R11,250 (500 boxes x (R300 x 7.5%)).
Entity A knows that based on its history with Entity B that Entity B always makes use of the settlement discounts. Thus the settlement discount would be R3,469 ((R150,000 -11,250) x 2.5%)
However, revenue should be recognised net of any discounts, rebates or incentives and therefore revenue is R135, 281 (R150,000 – R11,250 – R3,469).
The journal entry will be as follows:
Debit Credit
R R
Receivable 135,281
Revenue
[(500 x R300) - ((500 x (R300 x 7.5%))] – (2.5% x (R150,000 – R11,250)
135,281
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Issued February 2020 Page 18 of 25
7. Rendering of Services
The rendering of services usually involves the performance of an agreed task over a period of
time. At the initial stages of the contract, the parties usually have agreed to each party’s rights
and obligations, the price to be paid and the terms of settlement.
The recognition of services rendered depends on whether or not the outcome (results) can be
measured reliably (refer to the section on specific recognition criteria for detail).
7.1 Stage of completion
The recognition of revenue with reference to the stage of completion of a transaction is often
referred to as the percentage of completion method. Determining the stage of completion of a
transaction can be done in a variety of ways and, depending on the nature of the transaction,
these methods may include:
• Survey of work performed;
• Service performed to date as a percentage of the total service to be performed; or
• The portion of cost incurred to date as a percentage of the total estimated cost of the
transaction (only cost for services rendered to date should be included in the cost
incurred to date).
Note should be taken that progress payments and advances received often do not reflect the
service performed.
Example: Stage of completion
Entity A is providing valuation services to Entity B. As per the agreement, Entity A will value 300 properties at a total cost of R150,000. This will be a 6 month project. At reporting date Entity A has only valued 60 properties. Reporting date is 30 June 20X8.
Records of Entity A at reporting date
For the current period Entity A will only record the revenue for the 60 properties for which valuation services were rendered. The stage of completion is calculated by determining the services performed to date as a percentage of total services rendered.
Stage of completion: 20% = 60 property/300 properties
Revenue to be recognised: R30,000 = R150,000 x 20%
When service is determined by a number of acts, which cannot be determined, over a specific
period, revenue is recognised on a straight line basis over the specific period unless some
other method better represents the stage of completion.
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Issued February 2020 Page 19 of 25
7.2 Estimated outcome of transaction
When the outcome of a transaction cannot be measured reliably then the revenue to be
recognised is limited to the expenses recognised which are recoverable. In these instances
no surplus or deficit will be recognised.
When the outcome of a transaction cannot be measured reliably and the cost incurred is not
recoverable, no revenue is recognised and all cost incurred is recognised as an expense.
An entity is generally able to make reliable estimates after it has agreed to the following with
the other parties:
• Each party’s enforceable rights regarding the service to be performed and received by
the parties;
• The consideration to be exchanged; and
• The manner and terms of settlement.
8. Sale of Goods
When goods are sold, revenue is recognised when all of the conditions have been satisfied
(refer to the section on specific recognition criteria for detail).
8.1 Significant risk and rewards of ownership
If significant risk and reward of ownership is not transferred, the transaction is not a sale
transaction and revenue is not recognised. In most cases significant risk and rewards of
ownership is transferred with the transfer of legal title or the passing of possession to the
purchaser. However in certain cases the significant risk and rewards can be transferred
without the transfer of legal title. In these cases the seller will retain legal title to the goods
only to protect the collectability of the amount due.
Granting a typical guarantee or warranty normally does not result in the retention of significant
risks by the seller and, consequently, would not rule out the recognition of revenue. However,
some warranty obligations may indicate that the significant risks and rewards of ownership
have not been passed to the buyer, or that the seller has not performed all of its obligations in
delivering a product that the buyer can use.
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Issued February 2020 Page 20 of 25
Example: Warranty obligation
Entity A supplies computers to other entities. The computers include a warranty of 24 months which is considered to be a normal warranty within the IT industry. Entity A will recognise the revenue from the sale of the computers at the time of sale of the computers to the other entities, as the normal warranty does not result in the retention of significant risks by Entity A.
However, Entity A would need to raise a liability for the warranties, by making a reliable estimate of future warranty costs which Entity A may incur on the computers sold, for example based on past experience and other relevant factors
When the buyer has a right of return and there is uncertainty about the possibility of return,
revenue is not recognised until the shipment has been accepted by the buyer or the goods
have been delivered and the time period for rejection has lapsed.
Example: Right of return by buyer
An entity manufactures medical equipment for the medical industry. The machines are of a much specialised nature, and as such the entity allows buyers a period of 1 week, upon their request, to determine whether the specialised machine purchased fulfils the specific needs of the buyers. If the buyers are not satisfied that it fulfils their specific needs, they may return the machine and obtain a full refund, on condition that the machinery is still in its original condition.
Dr Tom purchased a machine on 1 May to be used in his operating theatre, and has requested the entity to allow for a period of a right of return if he is not satisfied that the machine will be suitable for his specific needs in the operating theatre.
After the period of 1 week, Dr Tom notifies the entity that the machine meets the specific requirements, and that he will keep the machine.
The entity only recognises revenue on 8 May, which is after the period of allowing the customer a right of return has lapsed, and which is the date on which the significant risk of ownership has transferred.
8.2 Significant performance obligations
Revenue is recognised once all significant performance obligations have been met. For
example, when goods are subject to installation or inspection that is a significant part of the
contract, revenue is recognised only once the installation or inspection is complete.
GRAP 9 on Revenue from Exchange Transactions
Issued February 2020 Page 21 of 25
9. Interest, Royalties and Dividends or Similar Distributions
Revenue arising from the use by others of entity assets yielding interest, royalties and
dividends or similar distributions shall be recognised as follows:
a) Interest is recognised using the methods set out in the Standards of GRAP on Financial
Instruments and Statutory Receivables;
b) Royalties are recognised as and when they are earned in accordance with the substance
of the relevant agreement; and
c) Dividends or similar distributions are recognised when the owner’s right to receive
payment is established.
Example : Royalties
Entity A has published a book in the current year which can be used by various educational institutions, and has approached various book stores to sell the books. Entity A forms an agreement with each seller that it will earn a royalty of R20 for each publication sold. On a monthly basis each seller must issue Entity A with a statement indicating the number of books sold, and indicating the amount of royalties owing to Entity A.
Entity A will thus recognise royalty revenue on a monthly basis, for the number of books sold for the month.
The Northern Books bookshop issued Entity A with a statement for March indicating that it has sold 130 books for the month
As such, Entity A will record revenue of R2,600 (R20 x 130 books) for March.
GRAP 9 on Revenue from Exchange Transactions
Issued February 2020 Page 22 of 25
10. Entity Specific Guidance
Entity-specific guidance has been included where appropriate to provide specific guidance on
a subject that only relates to those types of entities.
Example: Prepaid electricity
Municipality B sells prepaid electricity for cash. The municipality also makes use of agents (e.g. service stations, grocery stores, etc.) which sells the prepaid electricity cards. At 30 June 20X8 the municipality has sold R3,000,000 worth of cards and revenue collected through the agents amounted to R5,000,000. The electricity usage monitor system indicates that R700,000 has not been used by the consumers at reporting date.
At 30 June 20X8:
The municipality will only recognised the revenue for the services already delivered. The municipality will provide for deferred income (income received in advance) where payments were received, but services were not yet delivered.
Debit Credit
R R
Bank (R3,000,000 + R5,000,000) 8,000,000
Revenue (R8,000,000 – R700,000) 7,300,000
Deferred income 700,000
The deferred income will be recognised when the services are delivered (electricity is used by the consumers)
Example: Cut-off of services delivered
Municipality C’s reporting date is 30 June 20X8. The last meter reading done before reporting date, for services delivered, was on the 12th of June and the first meter reading, after reporting, for services delivered was the 9th of July 20X8. The total water and electricity billed on the 9th of July 20X8 was R7,000,000.
Service delivered from the 13th of June 20X8 until reporting date should be recognised as revenue if it can be measured reliably, economic benefits will flow to the municipality, the state of completion can be measured reliably and the cost incurred to deliver the service can be measured reliably.
Municipality C calculates the stage of completion as (the number of days lapsed between the last reading before reporting date to reporting date) / (the number of days lapsed between the last reading before reporting date and the first reading after reporting date).
Days from last reading before reporting date to reporting date = 18 days (exclude the 12th and include the 30th of June)
Days from reporting date to first reading after reporting date = 13 days (excludes reporting date and include reading date)
Stage of completion = 58% [18 days / (18 days+13 days)].
GRAP 9 on Revenue from Exchange Transactions
Issued February 2020 Page 23 of 25
Journal entry at reporting date:
30 June 20X8 Debit Credit
R R
Receivables 4,060,000
Revenue (R7,000,000 x 58%) 4,060,000
GRAP 9 on Revenue from Exchange Transactions
Issued February 2020 Page 24 of 25
11. Useful links and references
Reference Location of reference
Frequently Asked Questions (FAQs)
on the Standards of GRAP
ASB website:
http://www.asb.co.za/frequently-asked-questions/
IGRAP 1 on Applying The
Probability Test On Initial
Recognition Of Revenue
ASB website:
http://www.asb.co.za/interpretations-approved-
and-effective/
IGRAP 4 on Rights to Interests
Arising from Decommissioning,
Restoration and Environmental
Rehabilitation Funds
IGRAP 6 on Loyalty Programmes
IGRAP 8 on Agreements for the
Construction of Assets from
Exchange Transactions
IGRAP 10 on Assets Received from
Customers
IGRAP 11 on Consolidation –
Special Purpose Entities
IGRAP 12 on Jointly Controlled
Entities -Non-Monetary Contributions
IGRAP 14 on Evaluating the
Substance of Transactions Involving
the Legal Form of a Lease
IGRAP 15 on Revenue - Barter
Transactions Involving Advertising
Services
IGRAP 17 on SCA where Grantor
Controls Significant Residual Interest
IGRAP 19 on Liabilities to Pay
Levies
IGRAP 20 on Accounting for
Adjustments to Revenue
ASB website:
http://www.asb.co.za/interpretations-approved-
and-not-yet-effective/
Guideline on The Application of
Materiality to Financial Statements
ASB website:
http://www.asb.co.za/guidelines/
Standard Chart of Accounts for Local
Government (mSCOA)
National Treasury website:
http://mfma.treasury.gov.za
GRAP 9 on Revenue from Exchange Transactions
Issued February 2020 Page 25 of 25
Reference Location of reference
(mSCOA – Municipal Standard Chart of Accounts)
Illustrative Financial Statements for
local government
National Treasury website:
http://mfma.treasury.gov.za
(mSCOA – Municipal Standard Chart of Accounts)