Advance payment under IFRS15

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Pinko
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Advance payment under IFRS15

Post by Pinko »

If the situation where a cleaning company to charge monthly service to customer for contract of one year. According to the contract, customer is required to do full advance payment before the cleaning work starts. If the revenue is recognised over time according to IFRS15. How to account for the advance payment of contract?

Initially

Dr Cash/Bank 1200
Cr Advance payment (Liability) 1200 Should I call Contract Obligation rather than advance payment?

Then monthly

Dr Advance payment 100
Cr Revenue 100


Are their journal entries correct?
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Marek Muc
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Re: Advance payment under IFRS15

Post by Marek Muc »

it's called "contract liability" in IFRS 15
https://ifrscommunity.com/knowledge-bas ... abilities/

your entries are correct

there's also the matter of significant financing component:
https://ifrscommunity.com/knowledge-bas ... -component

see examples 29 and 30 to IFRS 15
Pinko
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Re: Advance payment under IFRS15

Post by Pinko »

Thank you.
My understanding is when to use for advance payment is that when it is unconditional as same as trade receivable, is that right?
Because this is under conditional situation, that is why we have to use Contract liability as you suggested, right?
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Marek Muc
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Re: Advance payment under IFRS15

Post by Marek Muc »

I don't understand, what's your alternative to contract liability?
Pinko
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Re: Advance payment under IFRS15

Post by Pinko »

If contract asset is against accounts receivable, then contract liability is against accounts payable , I guess, is that right?
Then what is advance payment?
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Marek Muc
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Re: Advance payment under IFRS15

Post by Marek Muc »

if you need to pay, this is a financial liability under IFRS 9 (can be labelled as a trade payable)
if you need to perform and then recycle to revenue, this is a contract obligation (but can be labelled different way, IFRS 15 allows different labelling, e.g. advance payment)
Pinko
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Re: Advance payment under IFRS15

Post by Pinko »

Probably I do not understand properly but ...
My understanding is Financial liability (trade payable) and contract obligation (=Advance payment) is the conditionality, is that right?
Once the (performance) obligation has been completed, then , it is trade payable to be used,
Whereas if the obligation has not been completed then advance payment to be used.

Please kindly correct me, thank you.
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Marek Muc
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Re: Advance payment under IFRS15

Post by Marek Muc »

Pinko wrote: 03 Mar 2021, 02:38 Once the (performance) obligation has been completed, then , it is trade payable to be used,
no, once the performance obligation ('PO') is satisfied, the advance payment is transferred to revenue (Dr PO / Cr Revenue)
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