There are different interpretations as to when one should “discount” revenue or purchases. There are two totally different views – the first one being that discounting begins on the day after the recognition of a sale or purchase and the second one allows for the concept of “extended payment terms” beyond “industry norms”. Note: This does not apply to debtors or creditors.

This issue deals only with the initial identification of a financing component by sellers or buyers of goods in transactions that possibly contain financing elements. The assessment of whether the financing component should be separately identified and recognised – and the related determination of the sale and purchase price – should be performed on initial recognition at a contract or transaction level. This issue does not provide guidance for the application of transactions falling within the scope of IFRS 15.

Identification whether a transaction contains a financing element

The following should be considered in determining whether a transaction contains a financing element:

1. Differential pricing between the cash payment price and the price paid on deferred settlement terms;
2. Settlement terms deferred beyond industry norms and practice;
3. The date from which an entity is entitled to levy interest on overdue payments;
4. The existence of a transaction initiation process and credit assessment process;
5. Any collateral required for the transaction or payment;
6. A substantial amount of the transaction price is variable, the variability is outside the control of both parties, and the parties have decided to delay payment until a substantial amount of the variability is removed;
7. The business purpose for the different timing between delivery of the goods/ services and the payment; or
8. Volume of credit sales in relation to cash sales.

Example: View 1

Entity A sells goods to Entity B for R 1 000 on 30-day payment terms and expects payment in 30 days. Entity A does not charge its customers interest. Entity A has determined after considering qualitative factors that a financing element does not exist as the selling price will remain at R 1 000 at 30 days. Entity A should therefore recognise revenue for the sale of goods of R 1000. The following journal entry at transaction date is required.

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

Account           Debit           Credit
Receivable      1 000
Revenue                                 1 000

Example: View 2

Entity A sells goods to Entity B for R 1 000 on 30-day payment terms and expects payment in 30 days. Although Entity A does not charge its customers interest, as a result of recent regulatory findings they have deemed it prudent to follow regulatory advice which is that discounting begins on the day after the recognition of a sale or purchase. If one assumes that the interest rate is 12% then it would be 1% for 30 days. The present value or sale price at initial measurement would be R 990 and the financing component would R10. Entity.

The following journal entry at transaction date is required.

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

Account                                                                  Debit                Credit
Receivable                                                               990
Revenue (R1,000/1+[12%/365 days])                                              990
Receivable                                                                  10
Interest Received                                                                             10

Note: Neither view is right or wrong. It is important to verify each transaction by evaluating each of the 8 considerations as indicated as per “identification whether transaction contains a financing element” above.