4.1.2.2 ‘Consideration’ (a VAT concept) and ‘revenue’ (as an accounting concept)

Revenue is a crucial concept to users of financial statements in assessing an entity’s financial performance and position. However, revenue recognition requirements in IFRS differ from those in U.S. GAAP, and both sets of requirements need improvement. Therefore, the IASB and the FASB initiated a joint project to clarify the principles for recognizing revenue and to develop a common revenue standard for IFRS and U.S. GAAP. The standard should take effect in 2017, although it hadn’t at the time of finalising this document (February 2019).1

In my view, the rules for revenue recognition could be useful for determining the nature or character of a transaction and, therefore, its VAT consequences as well.

The proposed rules for ‘Revenue from Contracts with Customers’ should apply to all entities that enter into contracts with customers unless these contracts are in the scope of other standards (e.g. insurance contracts or lease contracts).2 The core principle of the proposed requirements is that an entity should recognise revenue to depict the transfer of (promised) goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.3 This is very similar to the EU VAT rules on determining the taxable amount for a supply of goods or services: ‘(…) everything which constitutes consideration obtained or to be obtained by the supplier, in return for the supply (…)’.4 Therefore, as I maintained above, it could be useful to compare the accountancy rules regarding revenue recognition with the EU VAT rules for the purpose of determining the VAT treatment of supplies of goods and services, e.g. whether there is a single (composite) supply or whether the supply consists of several distinct elements and how the consideration should be apportioned to the various elements of a supply. The CJEU has also accepted certain accounting principles from IASB as relevant for determining the VAT treatment of (certain) transactions.5

The first step in determining what elements in a multiple-element transaction are made for consideration (and, therefore, at the same time, which elements are not) is determining which elements are actually included in a multiple-element transaction.