The criteria, and what is not revenue

What revenue is

Revenue is the inflow from a company's ordinary activities — selling goods, rendering services, letting others use its assets for interest or rent. A ski centre's revenue is passes, rentals, lessons and café sales. Selling the old snowmobile is not what Northlake is in business to do, so the excess of the price over its carrying amount is a gain, reported below operating income (L6.6), not revenue. The distinction matters because a lender reads the revenue line as what the business does, repeatably.

When revenue is recognised — ASPE s.3400

The standard says revenue is recognised when performance is achieved, the amount is measurable, and collection is reasonably assured. Performance, for a sale of goods, means the significant risks and rewards of ownership have passed to the buyer and the seller keeps no continuing managerial involvement or effective control; for a service, that the service has been rendered. Textbooks usually split the first into two, giving four criteria to test:

1. Risks and rewards of ownership have transferred to the customer (or the service has been performed).
2. The seller has no continuing involvement or control over what was sold.
3. The consideration is measurable — including any returns or allowances that will reduce it.
4. Collection is reasonably assured.

The standard adds three signs that performance is achieved, and a case tests exactly these: persuasive evidence of an arrangement exists, delivery has occurred or the service has been rendered, and the price is fixed or determinable. The profession calls all of this the earnings approach, because it asks whether the revenue has been earned — a label, not a phrase from the standard. What is never a criterion is whether the cash has arrived: cash before performance is a liability; performance before cash is a receivable.

Worked example — four Northlake events

The day pass passes every test at the window. The season pass fails the first test on 5 December: the cash is in, the amount is certain, but Northlake has not yet groomed a single day of the season it sold — so the 600 is Unearned Revenue, released as the season elapses. A season is an indeterminate number of skiing days spread over four months, so the standard's rule is to recognise it straight-line over the period: one of four months by 31 December. The lesson program is a determinable number of acts — eight lessons — so it is recognised by reference to the acts performed, one-eighth per lesson taught. The snowmobile passes every test and is still not revenue, because selling equipment is not what Northlake does.

Six more, faster

• A café gift card sold for 50: liability — no goods yet delivered (L7.2).
• A corporate retreat invoiced 4,000 after the event, client is a long-standing customer: revenue — performed, measurable, collectible; the cash is just late.
• A deposit of 500 received for a wedding in July: liability — nothing performed; the no-refund clause does not change that.
• A rental ski sold as used equipment for more than its carrying amount: gain.
• Trail-grooming done for the township, unbilled at year end: revenue — an accrued revenue (L5.6).
• A sale to a customer whose cheque has bounced twice before and who offers no other payment: not yet — collection is not reasonably assured.