When it comes to accounting, Recognising revenue from the sale of goods is a fundamental yet crucial task. For CIBA members working with small and medium-sized enterprises (SME’s), understanding how to apply revenue recognition under IFRS for SME’s can make a significant difference in ensuring accurate financial reporting. This article will provide a detailed yet straightforward explanation of how to Recognise revenue from the sale of goods, along with practical examples that are directly applicable to the South African market.

What Is Revenue Recognition for Sale of Goods?

Revenue recognition for the sale of goods involves determining when and how to record the income your business earns from selling products. The key principle is to Recognise revenue when the control of the goods has transferred to the customer. This means that the customer now has the ability to use the goods, and the risks and rewards of ownership have passed from the seller to the buyer.

When Should Revenue Be Recognised?

According to IFRS for SME’s, revenue from the sale of goods should be Recognised when all the following conditions are met:

1. The significant risks and rewards of ownership have transferred to the buyer.

2. The seller no longer has control over the goods, which is typically when the goods have been delivered.

3. The amount of revenue can be measured reliably.

4. It is probable that the economic benefits (like payment) will flow to the seller.

5. The costs related to the sale can be measured reliably.

Practical Examples

Example 1: Sale of Retail Goods
Let’s say you run a small retail business in Durban, selling clothing and accessories. A customer purchases a jacket online, and you arrange for delivery to their home. Under IFRS for SMEs, you should Recognise the revenue when the jacket is delivered to the customer’s address. At this point, the significant risks and rewards of ownership have passed to the customer—they now own the jacket and can use it as they wish. Even if the customer pays with a credit card and the actual payment is received a few days later, the revenue should still be Recognised at the time of delivery because the economic benefit (payment) is expected to flow to your business.

Example 2: Manufacturing and Delivery of Custom Goods
Imagine you operate a small manufacturing business in Johannesburg that produces custom furniture. A client orders a custom-made dining table, and you agree on a delivery date two months from now. The client pays a 50% deposit upfront, with the balance due upon delivery. In this scenario, you should Recognise revenue when the dining table is delivered to the client, not when the deposit is received. This is because the control of the table—along with the risks and rewards of ownership—transfers to the client upon delivery, not at the time of payment. The deposit is recorded as a liability until the table is delivered.

Example 3: Sale of Agricultural Products
Consider a small farming business in the Western Cape that sells fresh produce to a supermarket chain. You deliver a shipment of apples to the supermarket, and the payment terms are set for 30 days after delivery. Here, revenue should be Recognised when the apples are delivered to the supermarket, as this is when the supermarket takes control of the goods. The 30-day payment delay does not affect the timing of revenue recognition, as it is highly probable that payment will be received.

Common Scenarios and How to Handle Them

1. Consignment Sales
   In consignment sales, goods are delivered to the customer (the consignee), but the seller retains ownership until the goods are sold to the end customer. For example, if you own a small business that sells artwork and you place some paintings in a gallery on consignment, you should not Recognise revenue until the gallery sells the paintings. Even though the gallery has physical possession of the goods, the risks and rewards of ownership remain with you until a sale is made.

2. Return Policies
   If your business offers a return policy, you may need to consider this when Recognising revenue. For instance, if you sell electronics with a 30-day return policy, you should Recognise revenue at the time of sale but may need to estimate and account for potential returns. This could involve setting up a provision for returns based on historical data, which adjusts the Recognised revenue to reflect the likelihood of returns.

3. Multiple Deliveries
   When goods are delivered in installments, you should Recognise revenue as each installment is delivered, provided the risks and rewards transfer with each delivery. For example, if you sell and deliver office furniture in three separate shipments, you would Recognise revenue with each shipment as long as the customer takes control of the goods upon delivery.

Conclusion

Recognising revenue from the sale of goods under IFRS for SMEs is about accurately reflecting when your business has fulfilled its obligations and when the customer has gained control of the goods. By following the principles outlined above and considering practical scenarios, you can ensure that your financial reporting is both accurate and in line with the standards.

Whether you’re dealing with retail sales, custom orders, or consignment arrangements, understanding and applying these principles will help you manage your revenue recognition process more effectively. Stay tuned for the next article, where we will explore revenue recognition for services, providing practical guidance and examples to help you navigate this crucial aspect of accounting for SMEs. 

Listen to the CIBA Academy CPD on IFRS for SMEs Section 23 Revenue to upskill your accounting skills. Get access to the CPD recording here.

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