One accounting issue I spent time mulling over is revenue recognition for board games. You may wonder, what is so difficult about it? As a board game set is being sold, its revenue will be recognised, is it not? This is of course true to a certain extent generally; however, we will explore the scenarios below to find out more why sometimes it may not be that straightforward.
Companies incorporated in Singapore are required by regulations to keep accounting records which enable true and fair financial statements to be prepared and that the financial statements shall comply with the requirements of the Accounting Standards, i.e. Singapore Financial Reporting Standard (“FRS”) [SFRS is broadly similar to International FRS (“IFRS”)]. Companies may face possible penalties if this were not done.
The new FRS115 – Revenue from Contracts with Customers – is effective 1 Jan 2018 and is vastly different from the previous revenue standard. Without going into detail on the 130-page document, the new FRS115 requires a company to perform the following:
I. Identify the contract with a customer
ii. Identify the performance obligations in the contract
iii. Determine the transaction price
iv. Allocate the transaction price to the performance obligations in the contract
v. Recognise revenue when the entity satisfies a performance obligation
Below are 5 scenarios encountered by CGS:
1) Cash on Delivery
This refers to a transaction whereby the recipient makes payment for a good at the time of delivery. A Chinese saying literally translated to be “one hand gives money; one hand gives goods” describes this adequately. Payment modes typically include cash, cheque or electronic payment and usually takes at most a couple of days. This is the most straightforward and revenue can be recognised almost immediately, upon the exchange of good for payment. Even though there is no written agreement, the “contract” and obligations take place when there is an exchange of goods for receipts and constitute revenue.
2) Consignment contract
A consignment contract is an agreement made between a consignee and consignor. The consignee agrees to store, transfer, or sell a particular item that belongs to the consignor, the board game publishing company. The terms may vary between contracts which may consequently, affect revenue recognition and accounting. Generally, ownership of the goods still fall under the board game company until the goods are sold, which will be reflected in the sales report to the consignor. Revenue can be recognised upon issuance of the invoice when sales reports are received, on expedient grounds.
3) Kickstarter
Kickstarter is a US based company that maintains a global crowdfunding platform focused on creativity and merchandising. Typically, crowd funds are received upfront from those interested in a particular product before manufacturing occurs. Manufacturing may take months, sometimes drag on for more than a year! Even though there is no contract, generally refund is supposed to take place in the event that fulfilment is unable to happen. When this happens, revenue should only be recognised upon fulfilment of the goods i.e. when the company satisfies the performance obligation which is the delivery of goods for payments in this case.
4) Bundle sales at conventions or sales
During conventions or events, or even promotions, products may be bundled together to boost sales. An example is product A is being sold at $10 while B’s price is $15. These are bundled together and sold for $20. The transaction price is then allocated based on the stand-alone selling price for each good. In this case, revenue for products A and B will be recognised as $8 (being $10 / $25 * $20) and $12 (being $15 / $25 * $20) respectively.
5) Royalties
A licensing agreement is entered between CGS and a licensee for the latter to product and sell the board games in another language. Royalties fees will be calculated based on the number of sets sold. Under such cases, sales-based royalty is calculated based on the transaction price stipulated in the agreement and is usually recognised upon issuance of the invoice.
As can be seen from the above, revenue recognition under the accounting principles applicable for companies may not be so straight forward. This may or may not coincide with the time the proceeds are received. Care needs to be taken for the terms of each contract to be applied or even computed correctly, in order to ensure revenue being recorded in a true and fair manner. This will help ensure the company’s compliance with the relevant regulations.
The above is strictly for information purposes only and does not constitute any accounting or technical advice. Any opinion is made on a general basis. A professional accountant or auditor or lawyer should be engaged for accounting advice on specific contracts or scenarios.
