Customer financing: separate sales from financing income
Deferred customer payments can combine a sale with financing. Reconstruct the cash selling price and interest schedule before attributing the entire contractual amount to operating revenue. A payment delay is not automatically a financing arrangement, so the reason for the timing gap belongs beside the arithmetic.
Establish the commercial reason for timing
IFRS 15 provides the relevant IFRS transaction-price framework. The historical AASB 15 December 2022 compilation, paragraphs 60–65, shows the IFRS-aligned significant-financing mechanism, exceptions and practical expedient. Its Australian applicability dates are explicit; use it as a historical reference and check the issuer’s applicable requirements.
Copy delivery date, cash price if observable, payment dates, credit characteristics and contractual protections. A retention designed to protect performance may have a different purpose from offering two years of credit. The contract’s headline statement that financing is free does not by itself establish that the economic financing effect is zero.
Hypothetical two-year receivable
Assume a machine transfers today, the customer owes 1,210 thousand exactly two years later, and the supported contract-inception financing rate is 10% annually. Assume the arrangement contains a significant financing component, collectability requirements are met, and no other obligations or variable payments exist. Ignore tax and expected credit losses solely to isolate timing.
The illustrative cash selling price is 1,210 divided by 1.10 squared, or 1,000. Revenue at transfer is therefore 1,000 under these assumptions. Financing income is 100 in year one and 110 in year two. Collection of 1,210 then settles the receivable.
| Time | Opening receivable | Interest | Cash collected | Closing receivable |
|---|---|---|---|---|
| Transfer | 0 | 0 | 0 | 1,000 |
| Year one | 1,000 | 100 | 0 | 1,100 |
| Year two | 1,100 | 110 | 1,210 | 0 |
Total financing income is 210. Calling the full 1,210 immediate sales revenue would overstate the assumed operating sale and erase the financing return. Calling the later 1,210 collection new sales would count the same transaction again.
Build the separation worksheet
For each material contract class, record nominal consideration, delivery schedule, payment schedule, financing conclusion, rate source, present value, sales revenue, interest income and cash settlement. Keep the original rate and later credit-loss assessment in different fields. A deterioration in creditworthiness is not simply a reason to rewrite the original sales price using a new market yield.
Run the schedule in both directions. Present value should accrete to the promised cash amount under the stated rate and timing. If the bridge fails, inspect payment frequency, deposits, fees, day-count assumptions and partial delivery before plugging the residual into revenue. A multi-obligation contract may require an allocation analysis beyond this single-machine example.
Compare business performance on compatible terms
Suppose a competitor sells the same assumed machine for 1,000 cash immediately. Comparing its 1,000 sale with the first company’s 1,210 nominal bill exaggerates operating pricing power. The credit exposure and financing income still matter, but they answer a separate question about funding customers.
Observe growing installment receivables, promotional terms and changes in payment protection. Customer prepayments can reverse the financing direction, yet long lead time alone does not settle the conclusion. Some contracts have reasons for prepayment other than financing. Public disclosures may provide only aggregated terms, leaving an exact rate or financing split unreproducible.
The research conclusion should identify the financing assumption, the operating amount that can be compared and the remaining cash exposure. A transparent illustrative schedule is useful even when it shows why a precise adjustment cannot be made from public information.
A further cash check is useful: no customer cash arrives during year one in the example, although the receivable and financing income both rise. Do not use that income as evidence that the equipment sale generated immediate operating liquidity. The maturity date remains the observable collection checkpoint.
FAQ
Does every payment period longer than a year require this exact calculation?
No. Assess the arrangement and relevant exceptions; the example assumes the financing conclusion rather than proving it from duration alone.
Is financing income the same as cash received?
No. The example recognizes interest before collection. Credit risk and actual settlement require separate checks.