Early or late payment and the time value of money
When a customer pays long before or long after delivery, revenue may need an interest adjustment. The one-year relief, the exceptions and the entry.
By Achekam · · 6 min read · For Accountants & audit firms in South Africa, Nigeria, Kenya
A client that sells on long credit terms, or collects a large payment long before it delivers, is doing two things at once. It is selling goods or services, and it is either lending money to its customer or borrowing money from it. Most small-company statements ignore the second half of that, and most of the time nobody is misled. The preparer's job is to know when the second half starts to matter.
Picture a solar installer that lets a private school pay for a rooftop system over several years, or a software house whose customer prepays a multi-year licence well before go-live. In both cases the cash and the delivery sit far apart, and the agreed price quietly contains a financing element. This article covers the relief that lets most clients skip the adjustment, the contracts that fall outside it, and how to book and describe the adjustment when one is needed, whether the client is in Johannesburg, Lagos or Nairobi.
The one-year relief
ACCA's technical article on IFRS 15 explains that the standard does not require the transaction price to be adjusted for the time value of money if the period between the transfer of the goods or services and the payment is one year or less. That single sentence removes the question for the great majority of trading clients: a retailer paid at the till, a wholesaler on ordinary credit terms, a consultant billing monthly in arrears.
Notice what the relief measures. It is the gap between two dates, delivery and payment, not the length of the contract. A long maintenance agreement billed each month as the service is given never opens a long gap, so it sits comfortably inside the relief. A short contract with payment deferred for a long time after delivery does not.
Where the relief applies, the price stays at the agreed amount. IFRS 15 describes the transaction price as the amount of consideration to which the entity expects to be entitled for transferring the promised goods or services, and for these contracts that is simply what the customer agreed to pay. If the client relies on the relief, it is good practice to say so in the revenue policy rather than leave the reader guessing.
Long credit terms and large advance payments
Two patterns push a contract outside the relief.
- Deferred payment. The client delivers now and the customer pays over a period longer than a year. Equipment sold on instalments and extended terms negotiated with a large customer are the usual examples.
- Advance payment. The customer pays more than a year before it receives what it bought. Prepaid multi-year subscriptions, deposits on custom-built goods and upfront fees on long projects fall here.
Falling outside the relief does not automatically mean an adjustment. The question becomes whether the timing gives one side a financing benefit that is significant to the contract, which is what IFRS 15 means by a significant financing component. That is a judgement. Read the standard's own guidance on financing components, weigh the size of the gap and the amounts involved for this client, and write the reasoning in the working papers either way. A conclusion of "not significant" with no reasoning is the point a reviewer will query.
Keep the financing question separate from any variable element in the price. Under IFRS 15, where the promised consideration includes a variable amount, the entity must estimate the amount it expects to be entitled to. A volume rebate or a penalty clause is that kind of question; the time between delivery and payment is a different one, and both can sit in the same contract.
Payment timing does not decide when revenue is recognised
A common confusion is to treat the financing question as a timing question. ACCA notes that the timing of a customer's payment is not relevant to when revenue is recognised under IFRS 15. Revenue follows the transfer of goods or services; the walk through the standard's steps in applying IFRS 15's five steps shows where that decision is made.
So the financing adjustment changes how much of the money is revenue and how much is interest. It does not move revenue into an earlier or later year. A prepayment received long before delivery still waits as a liability until the client performs, as covered in customer deposits and contract liabilities, and a sale on long instalments still produces its revenue when the goods change hands.
Separating interest from revenue with an adjusting entry
A worked example in words. The solar installer completes and hands over the school's system in the final month of the year, and the agreement lets the school pay in instalments over several years. The installer concludes, and documents, that the financing benefit to the school is significant. At handover, revenue is measured without the financing element, the receivable is recorded on the same basis, and the difference is recognised as interest income over the years in which the school pays. In this first year almost nothing of that interest has been earned yet.
The software house with the large prepayment faces the reverse. It has effectively borrowed from its customer until go-live, so the financing element is a cost to the software house over that period rather than income. Work out the effect on a schedule kept with the working papers, showing the rate used and why it was chosen.
In Achekam, these corrections are made at year end as adjusting entries in the Studio. Staff post the entry against the client's trial balance, and an entry that later proves wrong is reversed with a record of who reversed it and why, rather than deleted, so the reviewer can follow the history. Because the notes take their figures from the mapped trial balance, the revenue and interest notes reflect the split once the entry is in.
Policy and note wording
The Studio's standard policy wording is based on IFRS for SMEs and carries a label asking for review before issue. A full IFRS client applying IFRS 15 needs its revenue policy checked line by line, and where the standard text does not describe what the client does, staff write the client's own policy. A useful policy says three things: when revenue is recognised, whether the client uses the one-year relief, and how it treats contracts with a significant financing component. Any fact the trial balance cannot supply, such as the rate used, stays marked "[to be completed]" until someone fills it in.
A short checklist before sign-off:
- List contracts where delivery and payment are more than a year apart.
- For each, record whether the financing benefit is significant, and why.
- Where it is, calculate the split and keep the schedule.
- Post the adjusting entry and confirm that the revenue and interest lines moved.
- Make the policy describe what the client actually does.
The definitive text sits in the standard. ACCA's technical article revisiting IFRS 15 walks through the five-step model, including how the transaction price is determined, and is a good briefing for a junior before they review a client's long-dated contracts.
Start with the contracts list. For most clients it will be short or empty, and saying so in the file is itself useful evidence that the question was asked.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
