When an entity offers a period of "interest-free" credit, how should the revenue be recognized?

When an entity offers a period of "interest-free" credit, it is essentially providing a financing component along with the sale of goods. According to the relevant accounting standards, specifically IFRS 15 about revenue recognition, the total consideration for the sale must reflect the fair value of the goods and any financing components that may exist.

In this scenario, option B is the appropriate choice because it allows for the separation of the fair value of the goods from the financing income. The fair value of the goods at sale is recognized as revenue immediately when the goods are delivered to the customer. However, because the credit period involves a time delay in payment, the entity must also recognize the financing income separately. This financing income reflects the implicit interest that the seller would have earned if the buyer had paid cash upfront.

By reporting both the fair value of the goods and the financing income separately, the financial statements accurately convey the nature of the transaction, acknowledging both the immediate revenue component and the future income expected from the financing arrangement. This approach ensures compliance with accounting principles that require revenue to be recognized in a manner that reflects the transfer of control over the goods and the nature of any financing provided.