How to Recognise Revenue in Multi Component Sales under IAS 18

What is a Multi-component Sale?

So far we’ve looked at revenue from the viewpoint of selling one good or one service at a time.

However, often goods or services can be packaged together for sale in one deal.

Examples of this include the sale of:

  • A washing machine sold with an additional extended warranty
  • A television service sold with telephone and broadband

What we need to know for the purposes of IAS 18 – Revenue, is whether or not the transactions can be split.

What we want to do is split the transaction up into its separately identifiable components, and apply the revenue recognition criteria to each of those components.

If the transaction cannot be split up into components, the recognition criteria is applied to the transaction as a ‘group’.

2. Separately identifiable

Where the individual components of the transaction are separately identifiable, the recognition criteria is applied to each component individually.

For example, if we sell a washing machine with an extended warranty, the selling price of the washing machine is recognised immediately, and the price associated with the warranty is deferred and recognised over the period of the warranty.

The ability to undertake the split of the transaction will be largely dependent on the sales contract itself, and whether the components can be measured individually.

3. Group

If the components of the transaction cannot be individually identified, the revenue recognition criteria should be applied to the group of transaction as a whole.