*Source SNG Grant Thornton
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The revenue of an entity may decline as a result of the spread of the virus and the economic impact.
If the entity’s contract with the customer includes variable components (eg discounts), the entity must consider whether its previous estimates in this regard continue to be appropriate. IFRS 15 ‘Revenue from Contracts with Customers’ provides extensive guidance around variable consideration and the related constraint. It may be necessary for an entity to begin constraining its variable revenue even if this was not considered necessary prior to the COVID-19 pandemic.
As a result of COVID-19, an entity might:
•run a promotion in order to help maintain cash flows during temporary closure (eg some servicebased businesses, like gyms, are offering customers a discount if they prepay for future services)
• offer refunds or credits to its customers for goods or services that cannot be used during this period of crisis (eg hotels or event venues, travel agencies, gyms), and/or
• increase the sales of gift cards that can be used at a later date when the crisis is over.
An entity should review its revenue accounting policies to make sure they are still applicable given the current circumstances,
Where goods and services have been or are being rendered to customers who are either based in regions impacted by COVID-19 or significantly impacted by it, companies will need to assess whether collection is probable while evaluating new contracts. In the absence of such probability, companies may not be able to recognise revenue until or unless payment is received and becomes non-refundable, because such contracts are unlikely to meet the criteria to apply the normal IFRS 15 approach.
Certain revenue contracts may also become less profitable, or even loss-making. For example, an entity might face penalties as a result of delays or incur increased costs that cannot be recovered due to replacing employees or finding alternative suppliers. Management needs to consider whether any contracts are in an ‘onerous’ position and whether a liability needs to be recognised.