Understanding IFRS 15

Let’s say Wholesaler PLC has signed a contract to supply goods to Retailer Plc for $20 mn for the period of one year on 1st October 2019. However Retailer Plc has asked Wholesaler Plc to pay $1m for the purpose of creating more shelf space in their stores. How will Wholesaler Plc recognise revenue for the year ended 31st December 2019 if they supplied goods worth $4 mn during this period?

IFRS 15 states that exchange of consideration without exchange of goods or services constitutes the reduction of price. Hence the entire contract value has to be reduced by the fraction 1/20 = 5% for each transaction.

Also the 1m paid to Retailer plc will be accounted for as advance paid to customer in their books.

Accounting entries

1st October 2019

Dr Advance paid to customer 1mn

Cr Cash/Bank 1 mn

Considering supply of 4mn is made on 31st December 2019, the entry will be

Dr Receivable 4mn

Cr Sales (include 5% discount) 3.8 mn

Cr Advance to Customer 0.2 mn

Revenue booked for the year will be 3.8 mn. To be collected from client will be 4 mn and advance paid to customer will have a balance left of 0.8 mn.

Once the entire transaction is over, total revenue booked will be 19 mn cash paid for racks would be 1 mn and cash collected for goods would be 19 mn. In substance you received only 19 mn for the sale and hence you recognise the 5 percent discount on each transaction.

Hope this helps.

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