Question

Simon Ltd receives a non-refundable upfront fee of $2,000 from Customer C for financial consultation advice, on 1 May 2023. Under the agreement with Customer C, Simon Ltd must provide ongoing consulting services until 1 May 2024. An additional amount of $100 per hour is charged for these ongoing services. The normal market rate for equivalent initial consultation fees is $1,400. Required:

Refer to the above information, when and what value should revenue be recognised? Explain with reason(s) to support your answers (IFRS)

Answer 1

The following question is the case of Deferred Revenue (IFRS 15) which is also knows as unearned revenue. In this case as amount is received by the company in advance for the services which will be provided in the future. Under such circumstances the amount so received shall be treat as the liability for the company until the Service is provided.

Under the following case of Simon ltd, it will record $1,400 as revenue in the beginning only for it normal consultancy fee for the year as this has been agreed and the service period has begun (understand this with the example for Annual Maintenance Charges which are paid at the beginning of the year for the service covering whole year.

The remaining $600 will be treated as Advance from Customer or Deferred revenue and when the bills are raised for the Hourly charges in future as per the time spend of the service, they will be adjusted from that $600.

Journal entries for the same would be as follows:

1. On Reiving $ 2,000 from customer

Bank A/C – Dr                                           $ 2000

       To Sales A/C (Consultancy Fee) - Cr                        $1,400

       To Deferred Revenue A/C – Cr                                    $ 600

(Being $2,000 received from customer

Out of which 1,400 recognised as sales

And 600 as advance)

2. In future when the services will be provided and hourly time spent will be known

Deferred Revenue A/C –Dr                           $ Amount in future

       To Sales A/C (Hourly charges) –Cr                               $ Amount in future

(Being amount charged for hourly time

Given)