Notes – Revenue Recognition (IFRS 15 – ACCA)
Variable consideration IFRS 15 says that if a contract includes variable consideration (e.g. a bonus or a penalty for early or late completion) then the entity must estimate the amount it expects to receive, but only include such value within the transaction price if the likelihood of payment is highly probable. The method of estimation will depend on the potential outcomes, either the most likely amount if the contract has only two possible outcomes, or an expected value if an entity has a large number of contracts with similar characteristics.
Example 1: Most Likely Amount Method (Two Possible Outcomes)
Scenario
ABC Construction enters into a contract to build a warehouse for ₹10 million.
The contract states:
- If completed by 31 December, ABC receives a bonus of ₹1 million.
- If not completed by that date, no bonus is paid.
There are only two outcomes:
| Outcome | Amount |
| Complete on time | ₹11 million |
| Complete late | ₹10 million |
Management assesses that there is a 90% chance of completing on time.
Step 1: Estimate Variable Consideration
Since there are only two possible outcomes, IFRS 15 says the Most Likely Amount method is appropriate.
Most likely outcome = Receive bonus
Estimated transaction price:
Fixed consideration ₹10 million
Bonus ₹1 million
Total ₹11 million
Step 2: Apply the Constraint
Management concludes it is highly probable that the bonus will be earned and that a significant revenue reversal will not occur.
Therefore, the full bonus can be included.
Revenue Recognized
Transaction price = ₹11 million
Alternative
Suppose management believes there is only a 55% chance of receiving the bonus.
Even though the most likely outcome may still be the bonus, the company may conclude that it is not highly probable that the bonus will ultimately be received.
In that case:
Transaction price = ₹10 million
The bonus is excluded until uncertainty decreases.
Question
A company enters into a contract for ₹2,000,000.
The contract includes a performance bonus of ₹300,000 if the project is completed before 30 June.
Management estimates:
- 85% probability of achieving the bonus.
- Only two possible outcomes exist.
- It is highly probable that no significant revenue reversal will occur.
What transaction price should be recognized under IFRS 15?
Significant Financing Component under IFRS 15
IFRS 15 recognizes that sometimes a customer is effectively receiving financing from the seller.
If there is a significant gap between:
- When the customer receives the goods/services, and
- When the customer pays,
then part of the amount charged is not really revenue from the sale. It is interest income (if payment is delayed) or interest expense (if payment is made in advance).
Therefore, the transaction price must be adjusted to its present value.
Example 1: Interest-Free Credit Sale
Scenario
A company sells equipment today.
- Cash selling price today = ₹100,000
- Customer will pay ₹121,000 after 2 years
- The customer could borrow money at 10% per year
The contract says “0% interest”.
However, IFRS 15 looks at the economic substance, not the label.
Step 1: Calculate Present Value
Discount the future payment using the customer’s borrowing rate.
PV = Future Payment / (1 + r)^n
PV = 121,000 / (1.10)^2
PV = 121,000 / 1.21
PV = ₹100,000
Step 2: Determine Revenue
Revenue at the date of sale = ₹100,000
Not ₹121,000.
Step 3: Recognize Interest Income
The extra ₹21,000 is financing income earned over 2 years.
Year 1
Opening receivable ₹100,000
Interest (10%) 10,000
Closing receivable ₹110,000
Year 2
Opening receivable ₹110,000
Interest (10%) 11,000
Closing receivable ₹121,000
When the customer pays ₹121,000:
Cash received ₹121,000
Receivable settled ₹121,000
Journal Entries
At Sale Date
Dr Trade Receivable 100,000
Cr Revenue 100,000
End of Year 1
Dr Trade Receivable 10,000
Cr Interest Income 10,000
End of Year 2
Dr Trade Receivable 11,000
Cr Interest Income 11,000
Receipt of Cash
Dr Cash 121,000
Cr Trade Receivable 121,000
Question
ABC Ltd sells machinery on 1 January 20X1.
- Customer receives machinery immediately.
- Payment of ₹133,100 is due in 3 years.
- Customer’s borrowing rate = 10%.
Required: Determine the transaction price and financing component under IFRS 15.
Consideration Payable to a Customer (IFRS 15)
Sometimes an entity pays money to its customer. IFRS 15 requires us to determine why the payment is being made.
There are two possibilities:
1. Payment is for a distinct good or service
If the customer provides something of value in return (such as advertising, market research, shelf space, etc.), the payment is treated as a purchase expense, separate from the revenue transaction.
2. Payment is not for a distinct good or service
The payment is effectively a discount, rebate, coupon, or incentive given to the customer. In this case, it reduces the transaction price and therefore reduces revenue.
Example 1: Reduction in Transaction Price
Scenario
ABC Ltd sells goods to a retailer for ₹100,000.
ABC also agrees to pay the retailer ₹5,000 as an incentive for purchasing the goods.
The retailer does not provide any separate service in return.
Ans
The ₹5,000 is not payment for a distinct service.
Therefore, it is treated as a reduction of the selling price.
Calculation
Selling price ₹100,000
Less: incentive paid (5,000)
Transaction price ₹95,000
Revenue Recognized
Revenue = ₹95,000
Journal Entry
Dr Receivable 95,000
Cr Revenue 95,000
Example 2: Payment for a Distinct Service
Scenario
A manufacturer sells products to a supermarket for ₹500,000.
The manufacturer also pays the supermarket ₹20,000 to run a special advertising campaign featuring its products.
The advertising service could be purchased separately from other advertising agencies.
Analysis
The supermarket is providing a distinct advertising service.
Therefore, the ₹20,000 is not a reduction of revenue.
Instead, it is treated as a marketing expense.
Accounting
Revenue:
Revenue = ₹500,000
Advertising expense:
Expense = ₹20,000
Journal Entries
Sale of goods
Dr Receivable 500,000
Cr Revenue 500,000
Advertising service purchased
Dr Advertising Expense 20,000
Cr Cash 20,000
Practise Question
Question
XYZ Ltd sells inventory to a customer for ₹200,000.
XYZ agrees to pay the customer a rebate of ₹15,000 after purchase.
The customer provides no goods or services in exchange.
Required: Determine the transaction price.
Solution
Since the customer provides no distinct goods or services, the rebate is consideration payable to a customer and reduces the transaction price.
Contract price ₹200,000
Less rebate (15,000)
= Transaction price ₹185,000
Answer
Revenue to recognize = ₹185,000
Exam Trick to Remember
Ask:
“Is the customer giving me a distinct good or service?”
- Yes → Record as an expense/purchase.
- No → Treat as a reduction of revenue (transaction price).
Quick Summary
| Situation | Accounting Treatment |
| Customer provides advertising, marketing, research, shelf space, etc. | Separate purchase expense |
| Rebate, coupon, cashback, loyalty incentive, promotional allowance with no distinct service | Reduce transaction price and revenue |
If nothing of value comes back from the customer, the payment is usually just a discount in disguise, so revenue is reduced.
This is an IFRS 15 Step 4: Allocate the Transaction Price question.
The principle is:
The transaction price is allocated to each performance obligation based on its stand-alone selling price (SSP).
Since the technical support is not sold separately, we need to estimate its SSP.
Step 1: Identify Performance Obligations
There are two performance obligations:
- Machine
- One year’s technical support
Total contract price = $120,000
Step 2: Determine Stand-Alone Selling Prices
Machine
The machine is regularly sold separately for:
SSP of machine = $120,000
Technical Support
Technical support is not sold separately.
IFRS 15 allows estimation using an appropriate method.
Expected cost of support = $20,000
Mark-up normally charged = 50%
Therefore:
SSP of support
= Cost + 50% mark-up
= $20,000 × 150%
= $30,000
Step 3: Calculate Total SSP
Machine SSP $120,000
Support SSP 30,000
———————————
Total SSP $150,000
Step 4: Allocate Transaction Price
Allocate the actual contract price ($120,000) in proportion to SSPs.
Machine Allocation
120,000 × (120,000 / 150,000)
= $96,000
Technical Support Allocation
120,000 × (30,000 / 150,000)
= $24,000
Check:
$96,000 + $24,000 = $120,000
Accounting Treatment
At Delivery of Machine
The machine obligation is satisfied immediately.
Revenue recognised immediately = $96,000
Technical Support
The support is provided over 1 year.
Deferred revenue = $24,000
Recognize over the support period, usually on a straight-line basis:
$24,000 ÷ 12 months
= $2,000 per month
Answer
The stand-alone selling price of the technical support is estimated using a cost-plus approach:
$20,000 × 150% = $30,000
The transaction price of $120,000 is allocated based on relative stand-alone selling prices:
Machine: $120,000 × (120,000/150,000) = $96,000
Support: $120,000 × (30,000/150,000) = $24,000
Therefore:
- Revenue allocated to the machine = $96,000
- Revenue allocated to technical support = $24,000
The $96,000 is recognized when the machine is delivered, and the $24,000 is recognized over the one-year support period.
Question : Tech Co sells:
- A laptop
- A 2-year extended warranty
for a total package price of $2,500.
Tech Co normally sells:
- Laptop separately for $2,400
- Extended warranty separately for $600
1. Output Method
Definition
Revenue is recognized based on the value transferred to the customer.
The focus is on what has been delivered, not on costs incurred.
Common Output Measures
- Units produced
- Units delivered
- Milestones achieved
- Surveys of work completed
- Certifications by engineers or architect
Percentage Complete =
Output achieved ÷ Total expected output
Revenue Recognized =
Contract Price × Percentage Complete
Example 1: Units Delivered
ABC Ltd enters into a contract to manufacture and deliver 1,000 machines for ₹10,000,000.
By year-end, 400 machines have been delivered.
Progress = 400/1000 = 40%
Revenue = ₹10,000,000 × 40%
= ₹4,000,000
2. Input Method
Definition
Revenue is recognized based on the resources consumed or efforts expended.
The focus is on:
- Costs incurred
- Labour hours
- Machine hours
- Resources consumed
The most common input method is the Cost-to-Cost Method.
Cost-to-Cost Method
% Complete = Costs incurred to date ÷ Total estimated costs
Revenue = Contract price × % complete
Example 1: Cost-to-Cost Method
Contract Price = ₹120 million
Estimated Total Cost = ₹90 million
Cost incurred during Year 1 = ₹36 million
Step 1: Measure Progress
Progress = 36/90 = 40%
Step 2: Revenue Recognition
Revenue = ₹120m × 40% = ₹48m
Step 3: Profit Recognition
Revenue = ₹48m
Cost = ₹36m
Profit = ₹12m
Example – Input and Output Method
Let’s complete the example and see how IFRS 15 recognizes revenue over time.
Given Information
Contract price $500,000
Costs incurred to date $300,000
Estimated costs to complete $100,000
Work certified to date $400,000
Estimated total costs:
= Costs to date + Costs to complete
= $300,000 + $100,000
= $400,000
Method 1: Input Method (Cost-to-Cost)
The stage of completion is based on costs incurred compared with total expected costs.
Stage of completion
= Costs incurred to date ÷ Total estimated costs
= 300,000 ÷ 400,000
= 75%
Revenue to Recognize
Revenue
= 75% × Contract price
= 75% × $500,000
= $375,000
Profit to Date
Revenue recognized $375,000
Less costs incurred (300,000)
Profit recognized $75,000
Method 2: Output Method (Work Certified)
The stage of completion is measured using the value of work certified by the customer.
Stage of completion
= Work certified ÷ Contract price
= 400,000 ÷ 500,000
= 80%
Revenue to Recognize
Revenue
= 80% × $500,000
= $400,000
Profit to Date
Revenue recognized $400,000
Less costs incurred (300,000)
——————————-
Profit recognized $100,000
Comparison
| Method | % Complete | Revenue | Profit |
| Input (Cost) | 75% | $375,000 | $75,000 |
| Output (Work Certified) | 80% | $400,000 | $100,000 |
Which Method Does IFRS 15 Prefer?
IFRS 15 does not automatically prefer one method over the other.
The entity must use the method that best depicts the transfer of control of the goods or services to the customer.
- If costs incurred closely reflect work performed → Input method is appropriate.
- If certified work or milestones better reflect performance → Output method is appropriate.
Exam Answer
Since Mendy is entitled to payment for performance completed to date, the performance obligation is satisfied over time under IFRS 15.
Using the Input Method
Stage of completion = 300,000 / 400,000 = 75%
Revenue = 75% × 500,000 = $375,000
Profit = 375,000 − 300,000 = $75,000
Using the Output Method
Stage of completion = 400,000 / 500,000 = 80%
Revenue = 80% × 500,000 = $400,000
Profit = 400,000 − 300,000 = $100,000
Therefore, depending on the measure that best reflects performance, revenue recognized to date would be either $375,000 (input method) or $400,000 (output method).
Question
Build Co enters into a contract to construct a warehouse for a customer.
The contract meets the criteria for revenue recognition over time because Build Co has an enforceable right to payment for performance completed to date.
At the reporting date, the following information is available:
Contract price $1,000,000
Costs incurred to date $360,000
Estimated costs to complete $240,000
Work certified to date $700,000
Required:
- Calculate the stage of completion using the input method.
- Calculate the revenue and profit to be recognized to date using the input method.
- Calculate the stage of completion using the output method.
- Calculate the revenue and profit to be recognized to date using the output method.
A consignment arrangement occurs when a supplier (consignor) sends goods to another party (consignee), who will sell the goods to the final customer.
Key point: Revenue is recognized only when control of the goods passes to the consignee or end customer.
In a typical consignment arrangement, the consignee does not control the goods because:
- The supplier still owns the inventory.
- Unsold goods can usually be returned.
- The consignee earns a commission for selling the goods.
- The supplier bears the inventory risk.
Therefore, revenue is NOT recognized when goods are shipped to the consignee.
Example 1: Basic Consignment Arrangement
Facts
- ABC Ltd manufactures watches.
- ABC sends 100 watches to XYZ Stores on 1 December.
- Cost per watch = ₹4,000
- Selling price per watch = ₹6,000
- XYZ Stores earns a 10% commission on sales.
- Unsold watches can be returned to ABC.
- By 31 December, XYZ has sold 60 watches to customers.
Step 1: When goods are sent to XYZ Stores
Even though the watches have been physically transferred, control has not passed.
ABC still:
- Owns the watches
- Bears the risk of unsold inventory
- Can require return of unsold goods
Therefore:
Inventory remains on ABC’s books.
No revenue recognized.
Journal Entry
No sales entry.
Inventory continues to be reported as inventory.
Step 2: When 60 watches are sold to end customers
Now control passes to the final customers.
Revenue can be recognized.
Revenue = 60 × ₹6,000 = ₹360,000
Cost of Sales = 60 × ₹4,000 = ₹240,000
Commission Expense = ₹360,000 × 10% = ₹36,000
Journal Entries
Recognise Revenue
Dr Cash / Receivable 360,000
Cr Revenue 360,000
Recognise Cost of Sales
Dr Cost of Sales 240,000
Cr Inventory 240,000
Recognise Commission
Dr Selling Commission Expense 36,000
Cr Payable to XYZ Stores 36,000
Inventory Remaining
Unsold watches = 40
Value = 40 × ₹4,000 = ₹160,000
This remains as inventory in ABC’s statement of financial position.
Repurchase Agreements (IFRS 15)
A repurchase agreement exists when an entity sells an asset and either:
- has an obligation to buy the asset back, or
- has a right (option) to buy the asset back in the future.
Under IFRS 15, if the seller retains a right or obligation to repurchase the asset, the customer may not obtain control of the asset. Therefore, the transaction may not qualify as a sale.
Illustration
Xavier sells its head office to Yorrick Bank on 1 January 20X2 for $10 million.
Additional information:
- Carrying amount of head office = $10 million
- Fair value of head office = $18 million
- Xavier has an option to repurchase the building on 31 December 20X5 for $12 million
- Expected repurchase date = 4 years later
Step 1: Determine whether control has passed
Although legal ownership has been transferred to the bank, Xavier retains a right to reacquire the property.
Therefore, Yorrick Bank does not obtain substantially all the benefits associated with ownership of the building.
Hence, this is not treated as a sale under IFRS 15.
The head office remains on Xavier’s statement of financial position.
Step 2: Compare selling price and repurchase price
Original selling price = $10 million
Repurchase price = $12 million
Since the repurchase price is higher than the selling price, IFRS 15 requires the arrangement to be accounted for as a financing arrangement.
In substance, Xavier has borrowed $10 million and will repay $12 million after four years.
The extra $2 million represents finance cost.
Accounting on 1 January 20X2
Xavier receives cash of $10 million.
Journal Entry
Dr Cash $10 million
Cr Financial Liability $10 million
Why is it not a sale?
Suppose Xavier had really sold the building.
The building’s fair value is $18 million, yet Xavier sold it for only $10 million.
A rational seller would not normally sell an asset worth $18 million for $10 million.
This indicates that the arrangement is actually providing financing rather than representing a genuine sale of the asset.
Treatment of the Head Office
The head office remains recorded within Property, Plant and Equipment (PPE).
It is not derecognised because Xavier continues to control the economic benefits of the asset through its repurchase right.
Normal depreciation accounting would continue if applicable.
Subsequent Measurement of Liability
The liability must increase from:
$10 million → $12 million
over the four-year period.
Total finance cost:
$12 million − $10 million = $2 million
For ACCA FR purposes, this is often spread evenly:
Annual finance cost: $2 million ÷ 4 = $0.5 million per year
Accounting During Year Ended 31 December 20X2
Recognise finance cost for the first year.
Journal Entry
Dr Finance Cost $0.5 million
Cr Financial Liability $0.5 million
Position at 31 December 20X2
Statement of Financial Position
Assets
- Head office remains in PPE
Liabilities
- Financial liability = $10.5 million
Statement of Profit or Loss
Finance cost = $0.5 million
No revenue is recognised.
No gain on sale is recognised.
ACCA Exam Tip
When you see a repurchase agreement, immediately compare:
Repurchase Price vs Original Selling Price
Repurchase price > Selling price
Example:
Sold for $100,000
Repurchased for $120,000
→ Financing arrangement
→ No sale recognised
→ Asset remains on books
→ Difference treated as finance cost
Repurchase price < Selling price
Example:
Sold for $100,000
Repurchased for $90,000
→ Lease arrangement
→ Seller is effectively paying for the right to use the asset during the period
Question
ABC Ltd sells machinery to a bank for ₹50 lakh on 1 January 20X1. ABC has an option to repurchase the machinery after 3 years for ₹60 lakh.
Required
How should ABC account for the transaction?
Answer
Since the repurchase price (₹60 lakh) exceeds the selling price (₹50 lakh), the arrangement is a financing arrangement.
ABC should:
- Continue to recognise the machinery as PPE.
- Recognise cash received of ₹50 lakh.
- Recognise a financial liability of ₹50 lakh.
- Increase the liability over 3 years to ₹60 lakh.
- Recognise the ₹10 lakh difference as finance cost over the agreement period.
Key Rule to Remember
If the seller retains a right or obligation to repurchase an asset and the repurchase price is greater than the original selling price, the transaction is accounted for as a financing arrangement and not as a sale.
Bill-and-Hold Arrangements (IFRS 15)
A bill-and-hold arrangement occurs when a seller invoices a customer for a product, but the seller continues to physically hold the product for a period of time before delivery.
Normally, revenue is recognized when goods are delivered. However, in a bill-and-hold arrangement, revenue can be recognized before physical delivery if control has already passed to the customer.
Illustration 6
Facts
On 31 December 20X1, Clarence sold:
- A machine worth $480,000
- Spare parts worth $20,000
Total contract value = $500,000
The machine was delivered immediately on 31 December 20X1.
Edgar requested Clarence to retain the spare parts because Clarence’s warehouse is close to Edgar’s factory.
Additional information:
- Spare parts are stored separately.
- Spare parts cannot be used or sold to another customer.
- Spare parts are available for immediate shipment whenever Edgar requests them.
- Expected storage period is 2-4 years.
- Holding costs are insignificant.
Step 1: Determine Whether a Bill-and-Hold Arrangement Exists
The spare parts have not been physically delivered.
Therefore, we must assess whether control has passed to Edgar despite the goods remaining in Clarence’s warehouse.
Under IFRS 15, revenue may be recognized if all of the following conditions are met:
1. The reason for holding the goods is substantive
✔ Yes
Edgar specifically requested Clarence to hold the spare parts because the warehouse is close to Edgar’s factory.
2. The goods are separately identified
✔ Yes
The spare parts are kept separately from other inventory.
3. The goods are ready for immediate delivery
✔ Yes
The spare parts can be shipped immediately whenever Edgar requests them.
4. The seller cannot use or redirect the goods
✔ Yes
Clarence cannot sell the spare parts to another customer.
Since all conditions are satisfied, Edgar has obtained control of the spare parts even though physical possession has not been transferred.
Step 2: Revenue Recognition
Because control has passed:
Revenue from machine
$480,000
Recognized in 20X1 because the machine has been delivered.
Revenue from spare parts
$20,000
Also recognized in 20X1 because the bill-and-hold criteria have been satisfied.
Total Revenue Recognized in 20X1
Machine Revenue = $480,000
Spare Parts Revenue = $20,000
Total Revenue = $500,000
Why Is Revenue Recognized for the Spare Parts?
Many students think that because the spare parts remain in Clarence’s warehouse, revenue cannot be recognized.
This is incorrect.
IFRS 15 focuses on control, not merely physical possession.
Although Clarence still physically holds the spare parts, Edgar:
- Controls the parts
- Can demand delivery at any time
- Bears the benefits associated with ownership
Therefore, revenue is recognized.
Exam Tip
For a bill-and-hold arrangement, ask four questions:
- Did the customer request the arrangement?
- Are the goods separately identified?
- Are the goods ready for immediate delivery?
- Can the seller no longer use or redirect the goods?
If the answer is Yes to all four, control has passed and revenue can be recognized even though physical delivery has not yet occurred.
ACCA-Style Twist Question
ABC Ltd sells machinery for ₹900,000 and spare components for ₹100,000 on 31 December 20X5. The customer requests ABC to store the components for six months. The components are separately identified, ready for shipment immediately, and cannot be sold to anyone else.
Required
How much revenue should ABC recognize on 31 December 20X5?
Answer
Machine Revenue = ₹900,000
Components Revenue = ₹100,000
Total Revenue = ₹1,000,000
Reason: The arrangement meets the bill-and-hold criteria, so control of both the machinery and components has transferred to the customer.
One-Line ACCA Memory Rule
In a bill-and-hold arrangement, revenue is recognized before delivery only when the customer has obtained control of the goods, even though the seller continues to physically store them.
Principal and Agent (IFRS 15)
Under IFRS 15, an entity must determine whether it is acting as:
- Principal: sells its own goods or services and controls them before transfer to the customer.
- Agent: arranges for another party to provide the goods or services.
The distinction is important because it affects the amount of revenue recognised.
Principal
If an entity is acting as a principal, it recognises revenue at the gross amount received from customers.
Agent
If an entity is acting as an agent, it recognises revenue only for the commission or fee earned.
Illustration 7
Facts
Rosemary Co sold goods worth $2 million on behalf of Elaine.
Rosemary was acting as an agent.
Rosemary earned a commission of 20% on sales.
The remaining $1.6 million was paid to Elaine.
Step 1: Calculate Commission
Sales value = $2 million
Commission = 20%
Commission Revenue = $2 million × 20%
= $400,000
Amount remitted to Elaine:
= $2 million − $400,000
= $1.6 million
Step 2: Determine Revenue to be Recognised
Since Rosemary is acting as an agent, it does not control the goods before they are transferred to customers.
Therefore, Rosemary should not recognise the full sales value of $2 million as revenue.
Instead, revenue is limited to the commission earned.
Revenue recognised by Rosemary
= $400,000
Why Not Recognise $2 Million?
Suppose Rosemary records:
Revenue = $2 million
Cost of Sales = $1.6 million
Profit = $400,000
Although profit is correct, both revenue and expenses would be overstated.
IFRS 15 requires reporting the transaction based on its substance.
Since Rosemary merely arranged the sale and earned a commission, only the commission should appear as revenue.
Financial Statement Impact
Correct Treatment
Statement of Profit or Loss
Revenue = $400,000
No cost of sales relating to the amount payable to Elaine.
Profit = $400,000
Incorrect Treatment
Revenue = $2,000,000
Cost of Sales = $1,600,000
Profit = $400,000
Although profit is unchanged, revenue and expenses are materially overstated.
How to Identify an Agent
An entity is likely an agent when:
- It earns a fixed commission or percentage fee.
- Another party owns the inventory.
- Another party bears inventory risk.
- Another party is primarily responsible for fulfilling the contract.
- The entity simply arranges the sale.
How to Identify a Principal
An entity is likely a principal when:
- It controls the goods before sale.
- It bears inventory risk.
- It can determine the selling price.
- It is responsible for fulfilling the contract.
In this case, the full selling price is recognised as revenue.
ACCA Exam-Style Example
ABC Travel sells airline tickets worth ₹5,000,000 on behalf of an airline.
ABC earns a commission of 8%.
Calculation
Commission Revenue
= ₹5,000,000 × 8%
= ₹400,000
Revenue Recognised by ABC
= ₹400,000
Not ₹5,000,000.
The remaining ₹4,600,000 belongs to the airline and is not ABC’s revenue.
Quick Comparison
Principal
- Controls goods before transfer.
- Recognises gross revenue.
- Example: Seller of inventory.
Agent
- Arranges a sale for another party.
- Recognises only commission income.
- Example: Travel agent, insurance broker, ticket booking platform.
ACCA Memory Rule
Principal = Gross Revenue
Agent = Commission Revenue Only
For Illustration 7, Rosemary is an agent, so the amount reported as revenue in the Statement of Profit or Loss is $400,000, not $2 million.
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