Auditing Special Purpose Frameworks: Auditing Revenues—Part 1
The financial reporting framework for SMEs requires revenue to be recognized only when the required act in a transaction is completed and collection of consideration is probable. This is the same way U.S. GAAP requires revenue to be recognized.
In case of the goods soldusually required act is completed when the seller has transferred all the risks and rewards relating to goods to the buyer and the seller then exercises no more managerial involvement in goods sold.When it comes to the provision of services under long term contracts, consider performance based on completed contract method or percentage of completion method as suitable.
So the revenue is recorded when the services are provided or the goods are delivered and seller can make reliable estimate of the amount of revenue and its receipt is probable.
Multiple Deliverable Arrangements
Under the financial reporting framework (FRF) for Small and Medium Enterprises (SMEs), whena sales transaction comprises performance or delivery of more than one service or product at different times,the entity is required to smear revenue recognition criteria and record revenue for each component separately. An example would be revenue from warranty/maintenance contracts which would be recognized on a straight-line basis over the period of the warranty/maintenance agreement. Also a seller who sells large appliances would charge for the delivery separately and formaintenance agreement or warranty claims of that product (if any)separately. When the warranty fee is fixed, revenue would be recorded on a straight-line basis.
Interest income, royalties and dividend income are recognized in the same way as advised in the U.S.GAAP. Royalty income is bookedon the accrual basis. Interest incomeis recorded over the period as it accrues. And the dividend income is recorded when a shareholder becomes entitled to receive it.
Principal vs. Agent
Under both IFRAS and US GAAP agents are required to record only the commission as revenue. When you act as agent the question always arises on how to record revenue; whether to record gross bill amounts or net revenue.Judgments should be made based on the situations to get a better decision.