Revenue Recognition and Determination of Financial Results
Financial statements should provide information on a company’s financial position, performance, and changes in financial position that is useful to a wide range of users. Information on financial position is primarily presented in the balance sheet, while information on performance is primarily presented in the income statement.
The main elements of the income statement are revenues and expenses, which, when measured and compared, determine the financial result as a measure of performance.
In the Republic of Serbia, reporting entities, when maintaining accounting records and preparing financial statements, apply IFRS, IFRS for SMEs, and the Rulebook on the recognition, measurement, presentation, and disclosure of items in the individual financial statements of micro and other legal entities.
Below are general rules applicable to all reporting entities, regardless of the accounting framework applied; if there are significant differences, they will be noted separately.
IFRS 15 establishes a framework for defining the timing of revenue recognition and the amount at which revenue is recognized. This framework specifies that revenue is recognized in a way that reflects the transfer of goods or services in exchange for the consideration to which the entity expects to be entitled.
The revenue recognition principle under IFRS 15 involves a process consisting of five mandatory steps:
Identify the contract with the customer;
Identify the performance obligations in the contract;
Identify the rights of the parties, i.e., the transaction price;
Allocate the transaction price to the performance obligations;
Recognize revenue when the performance obligation is satisfied.
Under accounting regulations, revenue is considered an increase in economic benefits during the reporting period in the form of inflows or increases in assets or decreases in liabilities, resulting in an increase in equity, except for contributions from owners of capital.
The definition of revenue includes both revenue and gains. Revenue represents income from an entity’s ordinary activities and is reported under various headings, such as sales revenue, fees, interest, dividends, and royalties.
Gains represent income arising from activities that may not be part of the entity’s regular business operations. Gains increase economic benefits and, as such, are not treated differently from revenue.
Revenue includes only the gross inflows of economic benefits that the reporting entity receives or has a right to receive for its own account. Amounts collected on behalf of third parties, such as value-added tax (VAT), are not economic benefits and do not increase equity; therefore, they are excluded from revenue.
Similarly, if an entity acts in its own name but on behalf of third parties, gross inflows include the total collected amounts, which, however, do not increase the entity’s own equity. In such cases, revenue represents only the commission.
Revenue should not be equated with cash inflows, as cash may be received:
Before revenue is recognized — treated as an advance;
After revenue is recognized — as collection of receivables;
Simultaneously with revenue recognition — e.g., cash sales.
Revenue is measured at the fair value of the consideration received or receivable. Generally, the revenue amount in a transaction is agreed upon between the seller and the buyer. Revenue is measured at the fair value received or receivable, taking into account any rebates or trade discounts granted at the time of sale. Exceptionally, entities applying the Rulebook for micro and other legal entities recognize revenue from the sale of goods, products, and services not at fair value, but at invoice value, minus any granted discounts, VAT, and other taxes such as withholding taxes.
If there is uncertainty about the collectability of amounts already included in revenue, uncollectible amounts or amounts with reduced probability of collection are recognized as expenses, i.e., an appropriate adjustment is made, rather than correcting the originally recognized revenue.
