Deferred customer payments: separate revenue from financing
A seller transfers goods now and will collect £121,000 in two years. If the cash selling price is £100,000 and the arrangement provides a significant financing benefit, recording £121,000 as revenue at delivery includes two years of interest too early. Under UK-adopted IFRS 15, the financing assessment determines how to separate those amounts.
Ask what the payment delay pays for
IFRS 15 paragraphs 60 and 61 require adjustment for the time value of money when agreed payment timing provides a significant financing benefit to the customer or seller. The contract need not call an amount interest. Consider the cash selling price, the length of the gap and relevant market interest rates together.
A long gap does not settle the question. Paragraph 62 identifies cases without a significant financing component. These include advance payment where the customer controls delivery timing, substantial variable consideration depending on an event outside either party's substantial control, and a proportionate difference serving a non-financing purpose such as performance protection.
Paragraph 63 also permits a practical expedient when the expected period between transfer and payment is one year or less at contract inception. A period exceeding one year still needs the financing assessment; it is not an automatic discounting rule.
Separate the sale from two years of interest
All amounts, dates and rates in this example are hypothetical. Goods transfer on 1 January for a cash selling price of £100,000. Fixed payment of £121,000 is due exactly two years later. Assume the facts support a significant financing benefit to the customer and no paragraph 62 exception applies.
The supported separate-financing rate at inception is assumed to be the 10% annual effective yield implied by these prices. £121,000 / £100,000 = 1.21, and the square root of 1.21 minus one is 10%. This arithmetic is not a current market-rate quotation. A real rate needs evidence about the financing recipient's credit characteristics and any collateral.
On transfer, record Dr receivable £100,000; Cr revenue £100,000. Year-one interest is £100,000 × 10% = £10,000, taking the receivable to £110,000. Year-two interest is £110,000 × 10% = £11,000, taking it to £121,000.
At collection, record Dr bank £121,000; Cr receivable £121,000. Total cash agrees to £100,000 of customer-contract revenue plus £21,000 of separately recognised interest. Booking the full nominal amount as delivery-date revenue would overstate that revenue by £21,000.
| Event | Customer-contract revenue | Interest income | Receivable after event |
|---|---|---|---|
| Goods transfer | £100,000 | £0 | £100,000 |
| End year 1 | £0 | £10,000 | £110,000 |
| End year 2 before payment | £0 | £11,000 | £121,000 |
| Payment | £0 | £0 | £0 |
Keep the inception rate and the limits in view
Paragraphs 64 and 65 base the discount rate on a separate financing transaction at contract inception. Do not subsequently revise that rate because market rates or credit risk change. Present the financing effects separately from revenue from customer contracts. Interest is recognised only to the extent a contract asset, receivable or contract liability is recognised.
The example assumes a fixed price, one completed goods transfer and no credit loss. Cost-of-sales entries are omitted because the calculation concerns revenue and financing. Advance funding can produce interest expense instead; this receivable example does not determine its amount.
Sources and context, checked :
Document the contract decision before scheduling interest
For a suggested review record, identify expected transfer and payment dates at inception, explain the purpose of the timing gap and assess the paragraph 62 exceptions. Consider the one-year expedient where available.
Then support the cash price and inception financing rate, schedule interest separately and reconcile the receivable to the nominal cash due. Keep the collection-risk assessment separate. A price difference is evidence to investigate, not proof that every retention, advance or delayed payment contains financing.