Tailoring the revenue recognition policy
How a preparer tailors the revenue recognition policy to what a client actually sells, from goods and services to contracts that run over time.
By Achekam · · 4 min read · For Accountants & audit firms in South Africa, Nigeria, Kenya
Read the revenue policy in a random handful of small-company statements and the same paragraph keeps appearing: revenue is measured at the fair value of the consideration received or receivable, net of trade discounts and VAT, and recognised when the significant risks and rewards have passed. It is not wrong. For a builder, a software subscription business or a school, it is also not much use.
The revenue policy is one of the few places a reader learns how a business earns its money. This article covers why generic wording fails, how the policy differs for goods, services and longer contracts, the questions to ask the client and how to edit standard wording so it fits.
Why generic policy wording fails readers
A generic revenue policy causes three problems. It tells the reader nothing about when this client recognises revenue, which is the judgement that matters. It can contradict what the client actually does, describing revenue on delivery when the client takes deposits up front and books them as income. And it tells any reviewer that the preparer did not think about it.
The fix is not longer wording. It is wording that names this client's revenue streams and the point at which each is recognised.
Goods, services and contracts that run over time
The frameworks use different language, so start by knowing which one applies.
- Full IFRS uses IFRS 15's five-step model: identify the contract, identify the performance obligations, determine the price, allocate it, and recognise revenue when or as each obligation is satisfied, at a point in time or over time. The IFRS Foundation's summary of IFRS 15 sets out those principles for reporting revenue and cash flows from contracts with customers.
- IFRS for SMEs has its own revenue section, which in the edition most clients currently apply deals separately with the sale of goods, the rendering of services and construction contracts, recognising services and construction by reference to the stage of completion. A newer edition has since been issued, so check which edition the client applies.
Whichever framework applies, the policy should answer one question for each significant stream:
| Revenue stream | The question the policy must answer |
|---|---|
| Sale of goods | When does control, or the risks and rewards, pass: on dispatch, on delivery, on acceptance? |
| Services delivered at a point | When is the service complete? |
| Services over a period, such as subscriptions or retainers | Over what period, and on what basis, is revenue spread? |
| Construction and long projects | How is progress measured, and how are expected losses dealt with? |
| Agency arrangements | Is the client a principal, reporting gross revenue, or an agent earning a commission? |
Mention deposits and advance billings where they are significant, because they are a liability until earned, and variable consideration such as rebates and settlement discounts.
Questions to ask the client about how it earns
The answers usually sit with the owner or the sales staff, not in the ledger. Useful questions:
- What do you sell, and how is revenue split between those streams?
- When do you invoice: before, on or after delivery?
- Do customers pay deposits, and what happens if they cancel?
- Do you sell anything bundled, such as goods with installation or support?
- Do you sell on behalf of anyone else, earning commission rather than the full price?
- Do you give rebates, volume discounts or rights of return?
- Are any contracts running across the year end?
A school, a law firm, a builder and a retailer will give very different answers, which is exactly why one paragraph cannot serve them all.
Editing the standard policy so it fits
Achekam's Studio includes standard accounting policy wording based on IFRS for SMEs, labelled for review before issue, and staff can write their own policies. Treat the standard revenue wording as a skeleton:
- Keep the measurement sentence if it is accurate for the client.
- Replace the recognition sentence with one sentence per significant revenue stream.
- Add how progress is measured for any revenue recognised over time.
- Delete streams the client does not have.
Where an AI key is set up, AI can write narrative text such as note wording, which is checked in code and labelled "AI draft - review before issue". A draft can help with phrasing, but the client's answers to the questions above are what make the policy accurate. There is no separate accept step for each AI-written paragraph; the review stages and the partner's signature are the safeguards.
The reviewer's check against the income statement
The reviewer's test is consistency. Read the policy, then the income statement and the revenue note:
- Does every stream described in the policy appear in the revenue lines or the note, and the other way round?
- Does the policy imply balances, such as deferred income for deposits or contract assets for work in progress, and do they appear in the statement of financial position?
- Does the nature of business in the directors' report describe the same activities?
Staff can run an automated review of a draft that lists findings for a person to accept, resolve or dismiss; it is advice only and does not block signing. Each set names a preparer, a reviewer and an engagement partner, and only a user with a partner role can sign, so the final consistency check rests with people.
Revenue is also where auditors expect fraud risk, discussed in responding to revenue fraud risk. Policies in general are covered in accounting policies and notes.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
