transactions exchange revenue from

ACCOUNTING GUIDELINE

GRAP 9

Revenue From

Exchange

Transactions

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it may include inaccuracies or typographical errors and may be changed or updated without notice. NT may amend these guidelines at any time by

posting the amended terms on NT's Web site.

Note that this document is not part of the GRAP standard. The GRAP takes precedence while this guideline is used mainly to provide further

explanations on the concepts already in the GRAP.

GRAP 9 on Revenue from Exchange Transactions

Issued February 2020 of 25

Contents

1. Introduction .................................................................................................................. 4

2. Scope .......................................................................................................................... 5

3. Distinguishing between exchange and non-exchange transactions .............................. 5

4. Definition and Identification .......................................................................................... 5

5. Recognition of Revenue ............................................................................................... 6

5.1 Applying the probability test on initial recognition of revenue .............................. 6

5.2 Non-refundable transactions ............................................................................... 7

5.3 Identification of transactions ................................................................................ 8

5.4 Specific recognition criteria ............................................................................... 10

6. Measurement of Revenue .......................................................................................... 13

6.1 When inflow of cash and cash equivalents is deferred ...................................... 13

6.2 Measurement of revenue arising from statutory (non-contractual arrangements) ......................................................................................................................... 14

6.3 Exchange of goods and services ...................................................................... 15

6.4 Discounts, rebates and customer incentives ..................................................... 16

7. Rendering of Services ................................................................................................ 18

7.1 Stage of completion .......................................................................................... 18

7.2 Estimated outcome of transaction ..................................................................... 19

8. Sale of Goods ............................................................................................................ 19

8.1 Significant risk and rewards of ownership ......................................................... 19

8.2 Significant performance obligations .................................................................. 20

9. Interest, Royalties and Dividends or Similar Distributions ........................................... 21

10. Entity Specific Guidance ............................................................................................ 22

11. Useful links and references ........................................................................................ 24



1. Introduction

This document provides guidance on the accounting treatment of revenue from exchange

transactions.

The contents should be read in conjunction with GRAP 9.

For purposes of this guide, “entities” refer to the following bodies to which the standard of

GRAP relate to, unless specifically stated otherwise:

Public entities

Constitutional institutions

Municipalities and all other entities under their control

Trading entities and government components applying the standards of GRAP

Parliament and the provincial legislatures

TVET and CET colleges

Explanation of images used in manual:

Definition

Take note

Management process and decision making

Example


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Cash R1 000 Cash R1 000

Cash, goods or services R1 000

2. Scope

GRAP 9 is applicable to all entities preparing their financial statements on the accrual basis of

accounting in accounting for revenue from the sale of goods, rendering of services, interest,

royalties and dividends or similar distributions.

3. Distinguishing between exchange and non-exchange transactions

Exchange

Non-Exchange

4. Definition and Identification

Revenue includes only the gross inflow of economic benefits or service potential that are

received or receivable by the entity on its own account. Accordingly revenue is not intended

to include amounts collected on behalf of others. GRAP 109 on Accounting by Principals and

Agents provides further explanations on the recognition, measurement and disclosure

requirements in this regard.

An exchange transaction is one in which the entity receives assets or services or services, or has liabilities extinguished, and directly gives approximately equal value (primarily in the form of goods, services or use of assets) to the other party in exchange.

Therefore an exchange transaction is between two parties giving and/or receiving assets/services, etc. for the same value.

Non-exchange transactions are transactions that are not exchange transactions. In a non-exchange transaction, an entity either receives value from another entity without directly giving approximately equal value in exchange, or gives value to another entity without directly receiving approximately equal value in exchange.

The definition of non-exchange refers to “value” which in the definition of exchange transactions refers to cash, goods, services or use of assets. The “value” derived from the transaction is not the achievement of service delivery objectives, but rather the receipt of assets, services etc.

Revenue is the gross inflow of economic benefits or service potential during the reporting period when those inflows result in an increase in net assets, other than increases relating to contributions from owners.

Goods & Services R1 000


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Identifying revenue transaction is often not straightforward, as the underlying arrangement can

be challenging to understand and interpret. Accordingly an entity should assess the substance

of the transaction and not only the legal form. The substance is not based only on the

transaction’s visible economic effect; it will also have to be analysed based on all contractual

or statutory terms, any side letters or oral agreements or past practices. Only once the

transactions has been properly understood can the question of when and how much revenue

to recognise be addressed.

5. Recognition of Revenue

Revenue is recognised only when:

It is probable that economic benefits or service potential will flow to the entity; and

These benefits can be measured reliably.

Example: Recognition of Revenue

Entity A has delivered services to Entity B before the reporting date, however at reporting date Entity A has not yet invoiced Entity B for the service delivered. Entity A knows that the invoice would be for R120,000.

At reporting date it is probable that Entity B will pay for the services delivered by Entity A, thus it is probable that economic benefits will flow to Entity A. Entity A can measure this benefit reliably at R120,000 and therefore Entity A should recognise the revenue in respect of the services delivered to Entity B, even if the invoice has not yet been issued at reporting date.

Journal entry at reporting date in the records of Entity A:

Debit Credit

R R

Receivables 120,000

Revenue 120,000

Where revenue has been recognised, but the cash has not been received, a receivable will

be included as a financial asset / statutory receivable in the statement of financial position.

5.1 Applying the probability test on initial recognition of revenue

One of the conditions for the recognition of revenue is the probability of an inflow of economic

benefits or service potential to the entity. In the past, entities applied various practices in

assessing the probability of revenue collection resulting in inconsistent reporting on initial

recognition and/or at the end of the financial year.

IGRAP 1 on Applying the Probability Test on Initial Recognition of Revenue clarifies that at

the time of initial recognition of revenue it is not appropriate to assume that revenue will not


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be collected and therefore the full amount of revenue should be recognised at the initial

transaction date.

5.2 Non-refundable transactions

When services are being delivered over a period of time and the agreement includes a clause

stipulating that the fee payable is non-refundable, the entity should defer the revenue to be

recognised, therefore the revenue will be recognised based on a percentage of completion

basis (or other method as appropriate). The revenue should be recognised in surplus and

deficit as the service is provided.

When revenue is deferred because services are being delivered over a period of time and the

agreement includes a clause stipulating that the fee is not refundable on cancellation of the

contract, then on cancellation of the contract all deferred revenue for that contract is

recognised as revenue immediately.

Example: Non-refundable revenue

Members pay an annual fee in order for Entity A to provide services to them such as assisting in problems identified, issuing of membership numbers, etc. This service delivery is part of the mandate of the entity. The cost is as follows:

Annual fee = R6,000 (non-refundable) to be paid upfront; and

No additional monthly fee is charged.

During the reporting period 1 member paid the fee on the 1st of June 20X7 (as this was when he/she joined) and 5 members paid their fees on the 1st of October 20X7 (as this was when they joined). However, with effect from 1 January 20x8 the member who joined in June 20X7 cancelled the contract. The reporting date for Entity A is 31 March 20X8.

The revenue should be recognised over the period of the services being delivered which is 12 months (1 year).

Entity A provides public goods and services to private households. Entity A bills individual households on a monthly basis for goods provided and services rendered. Entity A estimates, based on past experience, that only 90 percent of the revenues will be collected. Entity A recognises the full amount of revenue base on the terms of the arrangement with each household, notwithstanding its knowledge based on past experience. Consideration should be given to whether there is objective evidence that an impairment loss has been incurred when making the impairment assessment for subsequent measurement of receivables at the reporting date.

The nature of revenue does not change just because the service has not been delivered. If the revenue would have been recognised as revenue from exchange transactions - services delivered (in accordance with GRAP 9), the revenue immediately recognised due to cancellation of services will also be recognised as revenue from exchange transactions - services delivered (in accordance with GRAP 9).


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Revenue to be recognised before cancellation of the contract by one member:

1 x R6,000 x 7/12 = R3,500 (1 June – 31 Dec)

5 x R6,000 x 6/12 = R15,000 (1 Oct – 31 March)

Total revenue = R18,500

In addition to this, revenue should be recognised, for non-refundable amounts, for all deferred revenue (revenue received in advance) when the service has been cancelled.

All deferred revenue to be recognised for the member who cancelled the contract as from 1 January 20X8 is R2,500 (R6,000 – R3,500).

The journal entries for the reporting period will be as follows:

1 June 20X7 Debit Credit

R R

Bank 6,000

Deferred revenue (revenue received in advance) 6,000

1 October 20X7 Debit Credit

R R

Bank (R6,000 x 5) 30,000

Deferred revenue (revenue received in advance) 30,000

31 March 20X8 Debit Credit

R R

Deferred revenue (income received in advance) 18,500

Revenue 18,500

Deferred revenue (income received in advance) 2,500

Revenue 2,500

5.3 Identification of transactions

The recognition criteria are applied to each individual transaction separately. However, there

are circumstances where a single transaction has more than one identifiable component. In

these instances the recognition criteria should be applied to each component separately.

Example: Single transaction with components

An entity advertised a machine to the public for R5,000 with a free two year service plan. However, for the entity, the selling prices consist of R4,520 for the actual machine and R480


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for the two year service plan. The entity sold one machine on 1 January 20X8. Reporting date is 31 March 20X8.

This single transaction has two components:

Selling of the machine for R4,520; and

A two year service plan for R480.

The entity should recognise these transactions separately. The revenue for the selling of the machine should be recognised immediately and the revenue for the service plan should be recognised over the period of the service plan.

The journal entry will be as follows:

31 March 20X8 Debit Credit

R R

Bank or receivables 5,000

Revenue 4,520

Revenue (R480 / 24 months x 3 months) 60

Deferred revenue (R480 / 24 months x 21 months) 420

Deferred revenue will be recognised as a liability in the statement of financial position.

The recognition criteria may also be applied to two or more transactions together. This can

only be done if the transactions are linked in such a way that the effect of one transaction

cannot be understood without reference to the other transaction or series of transactions.

Example: Linked transactions

An entity enters into a transaction on 1 May 20X8 to sell goods to the value of R10,000 to Company B. The entity then enters into a separate agreement with Company B to buy back the goods on 1 June 20X8 for R10,200. Reporting date is 30 June 20X8.

As the second transaction negates the effect of the first transaction, these transactions should be viewed as a single transaction to reflect the true substance of the agreements. As such the two transactions should be dealt with together as a unit.


1 May 20X8 Debit Credit

R R

Loss on sale of goods 200

Payables (R10,000 – R10,200) 200



5.4 Specific recognition criteria

When identifying transactions, the recognition criteria need to be considered depending on the specific circumstances of a transaction. Revenue

recognition criteria applied to a transaction is dependent on the revenue category. Each revenue category should comply with the general

recognition criteria plus the specific recognition criteria applicable to each revenue category. These revenue recognition criteria are summarised

below:

Revenue categories

Rendering of services Sale of goods Interest, royalties and dividends

Genera

l

revenu

e

recognitio

n

crite

ria

app

licab

le t

o

all

revenu

e

cate

gori

es It must be probable that economic

benefits or service potential associated with the transaction will flow to the entity; and

It must be probable that economic benefits or service potential associated with the transaction will flow to the entity; and

It must be probable that economic benefits or service potential associated with the transaction will flow to the entity; and

The revenue can be measured reliably The revenue can be measured reliably The revenue can be measured reliably

Specific

recog

nitio

n c

rite

ria p

er

revenu

e

cate

gory

Stage of completion of the transaction at the reporting date can be measured reliably; and

Significant risk and rewards of ownership of the goods have been transferred to the purchaser;

Interest is recognised using the effective interest rate method as set out in GRAP 104 on Financial Instruments

With regard to statutory receivables, interest is recognised using the cost method as set out in GRAP 108 on Statutory Receivables

Cost incurred and the cost to complete the transaction can be measured reliably.

Cost incurred and the cost to complete the transaction can be measured reliably; and

Royalties are recognised as they are earned in accordance with the substance of the relevant agreement.

The seller retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold.

Dividends or similar distributions are recognised when the owner’s or the entity’s right to receive payment is established.



Decision tree for recognition of services rendered:

RENDERING OF SERVICES

measured at fair value

Have the parties agreed on:

enforceable rights of each party;

consideration; conditions of

settlement

Recognition criteria met

Y

Recognise revenue to

degree which recognised

expenses are recoverable

N

INITIAL RECOGNITION AND MEASUREMENT

Recognise revenue with reference to the stage of completion

Y

Defer revenue recognition and

recognise consideration

already received as a

liability

N

Uncertainty over the

collectability of amounts

recognised

Calculate impairment

loss

Do nothing

SUBSEQUENT MEASUREMENT

Y

N

Refer to:

GRAP 104 on Financial Instruments or

GRAP 108 on Statutory Receivables



Decision tree for recognition of sale of goods:

SALE OF GOODS

measured at fair value

Where significant risks and rewards of ownership transferred to the

buyer?

Instances where not transferred: Seller retains obligation for

unsatisfactory service; Revenue for seller dependent

on revenue earned by the buyer;

Goods are shipped and needs to be installed, which is a significant part of the contract;

Purchaser has the right to cancel purchase, for reasons stipulated in contract and seller is uncertain about probability of return.

Recognition criteria met

Y




liability

N

INITIAL RECOGNITION AND MEASUREMENT

Recognise revenue

Y




liability

N

Uncertainty over the

collectability of amounts

recognised

Calculate impairment

loss

Do nothing

SUBSEQUENT MEASUREMENT

Y

N

Refer to:

GRAP 104 on Financial Instruments or

GRAP 108 on Statutory Receivables



6. Measurement of Revenue

The amount of revenue arising from a transaction (which is contractual in nature) is usually

determined by the agreement between the two parties. It should be measured at the fair value

of the consideration received or receivable after taking into account any trade discounts and

volume rebates.

Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.

6.1 When inflow of cash and cash equivalents is deferred

When the inflow of cash and cash equivalents is deferred then the fair value of the goods or

service may be less than the actual cash received or receivable, as the agreement effectively

represents a financing transaction. In these instances the fair value of the transaction is

determined by discounting all future receipts using an imputed rate of interest.

The imputed rate of interest is usually either:

The prevailing rate for a similar instrument of an issuer with a similar credit rating (the rate

the same customer will be charged for purchasing the same goods from another supplier);

or

A rate of interest that discounts the nominal amount of the instrument to the current cash

sales prices of the goods or services.

The difference between the fair value and the nominal amount (actual cash received or

receivable) is recognised as interest revenue in accordance with GRAP 104 on Financial

Instruments.

Example: Deferred settlement terms

The Entity A provides services to Entity B. The services are invoiced for R1,500 and the payment is due in 90 days from invoice date. Invoice date is 15 June 20X8. Normal credit terms for this type of service are 30 days. Entity A does not charge Entity B any interest; however the transaction is in substance a financing transaction due to the payment being deferred beyond normal credit terms. Assume that the client would have paid 9% interest for 90 days payment terms if the client obtained the service from another supplier. Reporting date is 30 June 20X8.



Journal entry at transaction date:

At the transaction date Entity A should record revenue at the fair value.

15 June 20x8 Debit Credit

R R

Receivable 1,478

Revenue (R1,500 / (1 + (9% / 365 days)) 60days ) 1,478

Thus the difference between the fair value (R1,478) and the nominal amount (R1,500) is interest (R22). This interest is recognised over the deferred payment term, which in this example is 60 days (90 days payment less 30 days normal terms).

At reporting date:

15 days has lapsed since transaction date which is still within the 30 days normal credit term period thus no interest is recognised at reporting date.

Journal entries after reporting date:

30 days has lapsed after the 30 days normal credit term period. Normal credit term period ended 15 July 20X8. Interest should be recognised as follows:

14 August 20X8 Debit Credit

R R

Receivable 11

Interest (R1,478 x (9% / 365 days) x 30 days) 11

60 days has lapsed after the 30 day normal credit term and 30 days has lapsed since interest was last recognised. Interest should now be recognised as follows:

13 September 20X8 Debit Credit

R R

Receivable 11

Interest ((R1,478 + R11) x (9% / 365 days) x 30 days) 11

Total interest earned for the 60 day period exceeding normal credit terms is R22 (R11 + R11).

6.2 Measurement of revenue arising from statutory (non-contractual arrangements)

The amount of revenue arising from a transaction which is statutory (non-contractual) in nature

is usually measured by reference to the relevant legislation, regulation or similar means. The

fee structure, tariffs or calculation basis specified in legislation, regulation or similar means is

used to determine the amount of revenue that should be recognised. This amount represents

the fair value, on initial measurement, of the consideration received or receivable for revenue

that arises from a statutory (non-contractual) arrangement. See GRAP 108 on Statutory

Receivables.



6.3 Exchange of goods and services

Goods and services can be exchanged for other goods and services instead of for cash and

cash equivalents, or the exchange can be for a combination of goods and service and cash

and cash equivalents. This exchange of goods and services is usually done in two basic ways.

One is where goods and service are exchange for similar goods and service and two is where

it is exchanged for dissimilar good and services.

Where goods and service are exchanged for goods and services of a similar nature and value,

the exchange is not regarded as a transaction that generates revenue. No transaction is

recorded.

Where goods and service are exchange for goods and service of a dissimilar nature, the

exchange is regarded as a transaction that generates revenue. In these transactions, revenue

is measured at the fair value of the goods or service received. When the fair value of goods

or service received cannot be measured reliably, revenue is measured at the fair value of

goods and services given up. An adjustment should be made to the fair value for any cash

and cash equivalents also payable in respect of these transactions.

Example: Exchange of dissimilar goods or services

Entity A falls under the Department of Arts and Culture and provides shows to the public on a regular basis, they also provide transportation for those attendees that do not have transport to the show. Entity A’s large mini-bus is in for repairs and they need a vehicle to provide transportation to a few attendees that will be coming to show. Entity B, the business next door, rents out mini-busses and other vehicles. Entity A approaches Entity B with the following proposal: Entity A will rent a mini-bus from Entity B for R1,200 (which is market related) but instead of paying cash Entity A will provide tickets for the show which can be attended by Entity B to the value of R1,200. The reporting period for both entities is 31 March 20X8.

There is an exchange of goods and services between Entity A and Entity B which is dissimilar in nature i.e. show tickets (R1,200) for the rental of a mini-bus (R1,200). Revenue should be recognised by Entity B at the fair value of the services receivable.

Records of Entity A

Rental expense for mini-bus.

Debit Credit

R R

Rental expense 1,200

Payable (Entity B) 1,200



Tickets given to Entity B to attend a show.

Debit Credit

R R

Payable (Entity B) 1,200

Revenue 1,200

Records of Entity B

Rental income for mini-bus.

Debit Credit

R R

Receivable (Entity A) 1,200

Rental income 1,200

Paying for the tickets.

Debit Credit

R R

General expenses 1,200

Receivable (Entity A) 1,200

6.4 Discounts, rebates and customer incentives

In certain instances an entity may provide discounts or rebates if a customer buys a certain

quantity or value of goods. When it is probable that this discount or rebate will be granted and

can be measured reliably, then the rebate or discount is recognised as a reduction of revenue.

Example: Discount or rebate

Entity B purchased 500 boxes of paper from Entity A at R300 a box. Entity B received a 7.5% trade discount due to the large quantity purchased.

Records of Entity A at transaction date

Revenue that Entity A would recognise (before taking into account discounts) is R150, 000 (500 boxes x R300 per box). Trade discount is R11,250 (500 boxes x (R300 x 7.5%)). However revenue should be recognised net of discounts or rebates and therefore the revenue to be recognised is R138,750 (R150, 000 – R11,250).




Debit Credit

R R

Receivable 138,750

Revenue (500 x R300) - ((500 x (R300 x 7.5%)) 138,750

In some cases entities provide incentives and in most instances it is in the form of an early

settlement discount. For example, Entity B will receive 2.5% discount on its account if it pays

within 7 days of invoice date. These incentives should be estimated at the date of transaction

and should be deducted directly from revenue. The reason for deducting it from revenue is

that the fair value of the receivable should be recognised.

Example: Incentives

Entity B purchased 500 boxes of paper from Entity A at R300 a box. Entity B received a 7.5% trade discount due to the large quantity purchased. Entity A will provide an additional 2.5% settlement discount if Entity B pays within 7 days of invoice date.

Entity A should estimate at transaction date whether Entity B will make use of the settlement discount offer. Entity A will base this on the payment history of Entity B.

Records of Entity A at transaction date

Revenue before discount or incentive that Entity A would recognise is R150,000 (500 boxes x R300 per box).

Trade discount is R11,250 (500 boxes x (R300 x 7.5%)).

Entity A knows that based on its history with Entity B that Entity B always makes use of the settlement discounts. Thus the settlement discount would be R3,469 ((R150,000 -11,250) x 2.5%)

However, revenue should be recognised net of any discounts, rebates or incentives and therefore revenue is R135, 281 (R150,000 – R11,250 – R3,469).


Debit Credit

R R

Receivable 135,281

Revenue

[(500 x R300) - ((500 x (R300 x 7.5%))] – (2.5% x (R150,000 – R11,250)

135,281



7. Rendering of Services

The rendering of services usually involves the performance of an agreed task over a period of

time. At the initial stages of the contract, the parties usually have agreed to each party’s rights

and obligations, the price to be paid and the terms of settlement.

The recognition of services rendered depends on whether or not the outcome (results) can be

measured reliably (refer to the section on specific recognition criteria for detail).

7.1 Stage of completion

The recognition of revenue with reference to the stage of completion of a transaction is often

referred to as the percentage of completion method. Determining the stage of completion of a

transaction can be done in a variety of ways and, depending on the nature of the transaction,

these methods may include:

• Survey of work performed;

• Service performed to date as a percentage of the total service to be performed; or

• The portion of cost incurred to date as a percentage of the total estimated cost of the

transaction (only cost for services rendered to date should be included in the cost

incurred to date).

Note should be taken that progress payments and advances received often do not reflect the

service performed.

Example: Stage of completion

Entity A is providing valuation services to Entity B. As per the agreement, Entity A will value 300 properties at a total cost of R150,000. This will be a 6 month project. At reporting date Entity A has only valued 60 properties. Reporting date is 30 June 20X8.

Records of Entity A at reporting date

For the current period Entity A will only record the revenue for the 60 properties for which valuation services were rendered. The stage of completion is calculated by determining the services performed to date as a percentage of total services rendered.

Stage of completion: 20% = 60 property/300 properties

Revenue to be recognised: R30,000 = R150,000 x 20%

When service is determined by a number of acts, which cannot be determined, over a specific

period, revenue is recognised on a straight line basis over the specific period unless some

other method better represents the stage of completion.



7.2 Estimated outcome of transaction

When the outcome of a transaction cannot be measured reliably then the revenue to be

recognised is limited to the expenses recognised which are recoverable. In these instances

no surplus or deficit will be recognised.

When the outcome of a transaction cannot be measured reliably and the cost incurred is not

recoverable, no revenue is recognised and all cost incurred is recognised as an expense.

An entity is generally able to make reliable estimates after it has agreed to the following with

the other parties:

• Each party’s enforceable rights regarding the service to be performed and received by

the parties;

• The consideration to be exchanged; and

• The manner and terms of settlement.

8. Sale of Goods

When goods are sold, revenue is recognised when all of the conditions have been satisfied

(refer to the section on specific recognition criteria for detail).

8.1 Significant risk and rewards of ownership

If significant risk and reward of ownership is not transferred, the transaction is not a sale

transaction and revenue is not recognised. In most cases significant risk and rewards of

ownership is transferred with the transfer of legal title or the passing of possession to the

purchaser. However in certain cases the significant risk and rewards can be transferred

without the transfer of legal title. In these cases the seller will retain legal title to the goods

only to protect the collectability of the amount due.

Granting a typical guarantee or warranty normally does not result in the retention of significant

risks by the seller and, consequently, would not rule out the recognition of revenue. However,

some warranty obligations may indicate that the significant risks and rewards of ownership

have not been passed to the buyer, or that the seller has not performed all of its obligations in

delivering a product that the buyer can use.



Example: Warranty obligation

Entity A supplies computers to other entities. The computers include a warranty of 24 months which is considered to be a normal warranty within the IT industry. Entity A will recognise the revenue from the sale of the computers at the time of sale of the computers to the other entities, as the normal warranty does not result in the retention of significant risks by Entity A.

However, Entity A would need to raise a liability for the warranties, by making a reliable estimate of future warranty costs which Entity A may incur on the computers sold, for example based on past experience and other relevant factors

When the buyer has a right of return and there is uncertainty about the possibility of return,

revenue is not recognised until the shipment has been accepted by the buyer or the goods

have been delivered and the time period for rejection has lapsed.

Example: Right of return by buyer

An entity manufactures medical equipment for the medical industry. The machines are of a much specialised nature, and as such the entity allows buyers a period of 1 week, upon their request, to determine whether the specialised machine purchased fulfils the specific needs of the buyers. If the buyers are not satisfied that it fulfils their specific needs, they may return the machine and obtain a full refund, on condition that the machinery is still in its original condition.

Dr Tom purchased a machine on 1 May to be used in his operating theatre, and has requested the entity to allow for a period of a right of return if he is not satisfied that the machine will be suitable for his specific needs in the operating theatre.

After the period of 1 week, Dr Tom notifies the entity that the machine meets the specific requirements, and that he will keep the machine.

The entity only recognises revenue on 8 May, which is after the period of allowing the customer a right of return has lapsed, and which is the date on which the significant risk of ownership has transferred.

8.2 Significant performance obligations

Revenue is recognised once all significant performance obligations have been met. For

example, when goods are subject to installation or inspection that is a significant part of the

contract, revenue is recognised only once the installation or inspection is complete.



9. Interest, Royalties and Dividends or Similar Distributions

Revenue arising from the use by others of entity assets yielding interest, royalties and

dividends or similar distributions shall be recognised as follows:

a) Interest is recognised using the methods set out in the Standards of GRAP on Financial

Instruments and Statutory Receivables;

b) Royalties are recognised as and when they are earned in accordance with the substance

of the relevant agreement; and

c) Dividends or similar distributions are recognised when the owner’s right to receive

payment is established.

Example : Royalties

Entity A has published a book in the current year which can be used by various educational institutions, and has approached various book stores to sell the books. Entity A forms an agreement with each seller that it will earn a royalty of R20 for each publication sold. On a monthly basis each seller must issue Entity A with a statement indicating the number of books sold, and indicating the amount of royalties owing to Entity A.

Entity A will thus recognise royalty revenue on a monthly basis, for the number of books sold for the month.

The Northern Books bookshop issued Entity A with a statement for March indicating that it has sold 130 books for the month

As such, Entity A will record revenue of R2,600 (R20 x 130 books) for March.



10. Entity Specific Guidance

Entity-specific guidance has been included where appropriate to provide specific guidance on

a subject that only relates to those types of entities.

Example: Prepaid electricity

Municipality B sells prepaid electricity for cash. The municipality also makes use of agents (e.g. service stations, grocery stores, etc.) which sells the prepaid electricity cards. At 30 June 20X8 the municipality has sold R3,000,000 worth of cards and revenue collected through the agents amounted to R5,000,000. The electricity usage monitor system indicates that R700,000 has not been used by the consumers at reporting date.

At 30 June 20X8:

The municipality will only recognised the revenue for the services already delivered. The municipality will provide for deferred income (income received in advance) where payments were received, but services were not yet delivered.

Debit Credit

R R

Bank (R3,000,000 + R5,000,000) 8,000,000

Revenue (R8,000,000 – R700,000) 7,300,000

Deferred income 700,000

The deferred income will be recognised when the services are delivered (electricity is used by the consumers)

Example: Cut-off of services delivered

Municipality C’s reporting date is 30 June 20X8. The last meter reading done before reporting date, for services delivered, was on the 12th of June and the first meter reading, after reporting, for services delivered was the 9th of July 20X8. The total water and electricity billed on the 9th of July 20X8 was R7,000,000.

Service delivered from the 13th of June 20X8 until reporting date should be recognised as revenue if it can be measured reliably, economic benefits will flow to the municipality, the state of completion can be measured reliably and the cost incurred to deliver the service can be measured reliably.

Municipality C calculates the stage of completion as (the number of days lapsed between the last reading before reporting date to reporting date) / (the number of days lapsed between the last reading before reporting date and the first reading after reporting date).

Days from last reading before reporting date to reporting date = 18 days (exclude the 12th and include the 30th of June)

Days from reporting date to first reading after reporting date = 13 days (excludes reporting date and include reading date)

Stage of completion = 58% [18 days / (18 days+13 days)].



Journal entry at reporting date:

30 June 20X8 Debit Credit

R R

Receivables 4,060,000

Revenue (R7,000,000 x 58%) 4,060,000



11. Useful links and references

Reference Location of reference

Frequently Asked Questions (FAQs)

on the Standards of GRAP

ASB website:

http://www.asb.co.za/frequently-asked-questions/

IGRAP 1 on Applying The

Probability Test On Initial

Recognition Of Revenue

ASB website:

http://www.asb.co.za/interpretations-approved-

and-effective/

IGRAP 4 on Rights to Interests

Arising from Decommissioning,

Restoration and Environmental

Rehabilitation Funds

IGRAP 6 on Loyalty Programmes

IGRAP 8 on Agreements for the

Construction of Assets from

Exchange Transactions

IGRAP 10 on Assets Received from

Customers

IGRAP 11 on Consolidation –

Special Purpose Entities

IGRAP 12 on Jointly Controlled

Entities -Non-Monetary Contributions

IGRAP 14 on Evaluating the

Substance of Transactions Involving

the Legal Form of a Lease

IGRAP 15 on Revenue - Barter

Transactions Involving Advertising

Services

IGRAP 17 on SCA where Grantor

Controls Significant Residual Interest

IGRAP 19 on Liabilities to Pay

Levies

IGRAP 20 on Accounting for

Adjustments to Revenue

ASB website:

http://www.asb.co.za/interpretations-approved-

and-not-yet-effective/

Guideline on The Application of

Materiality to Financial Statements

ASB website:

http://www.asb.co.za/guidelines/

Standard Chart of Accounts for Local

Government (mSCOA)

National Treasury website:

http://mfma.treasury.gov.za



Reference Location of reference

(mSCOA – Municipal Standard Chart of Accounts)

Illustrative Financial Statements for

local government

National Treasury website:

http://mfma.treasury.gov.za

(mSCOA – Municipal Standard Chart of Accounts)

transactions exchange revenue from

Documents