OBJECTIVE
The objective of this standard is to provide assistance in determining when to recognise revenue. It should be recognised when it is probable that economic benefits that can be measured reliably have accrued to the entity. IAS 18 Revenue sets out the criteria as to when revenue should be recognised and gives practical guidance as to the application of these criteria.
DEFINITIONS
Revenue is the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity when those inflows result in increases in equity, other than increases relating to contributions from equity participants.
Revenue only represents amounts received by the entity in its own account, it excludes monies received on behalf of third parties, such as sales taxes and value added taxes. When the entity acts as an agent the commission earned is treated as revenue and not the amounts received on behalf of the principal.
Fair Value is the amount for which an asset will be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.
RECOGNITION AND MEASUREMENT
IAS 18 Revenue states that revenue shall be measured as fair value either received or receivable taking into account any trade discounts or volume rebates allowed. The consideration in the vast majority of cases is in the form of cash and cash equivalents, however, companies may offer interest free credit and in this case the fair value is calculated by discounting the future cash flows using an imputed rate of interest. This imputed rate of interest is determined by either:
- The prevailing rate of interest on similar credit facilities, or
- The rate of interest that discounts the nominal amount of the facility to the current cash sales price of the goods or services.
In some circumstances it is necessary to recognise separately identifiable components of a transaction. For example, the sale of goods that includes a service contract: the entity should recognise a portion of the proceeds now that relates to the sale of the goods and defer an amount over the period of the service contract.
Goods and services may be exchanged for similar goods and services; this is not recognised as a transaction that generates revenue. If the goods and services swapped are dissimilar then the transaction is recognised as a transaction that generates revenue and the revenue recognised is fair value of the goods / services received adjusted by the amount of any cash or cash equivalents transferred. Fair value of goods received is only appropriate when it can be measured reliably, otherwise use the fair value of goods / services given up adjusted by the amount of cash / cash equivalents transferred.
SALE OF GOODS
Revenue from the sale of goods will be recognised when the following conditions are all met: a) The entity (seller) has transferred all the significant risks and rewards of ownership to the purchaser,
- The entity has no managerial involvement or control of the asset,
- The amount of revenue attributed to the sale can be measured reliably,
- Economic benefits will flow to the entity (seller) as a result of the transaction and
- The costs associated with the transaction can be measured reliably.
In most cases the transfer of significant risks and rewards usually occurs when legal title to the goods / asset is transferred. Revenue and expenses relating to a particular transaction should be recognised at the same time, this is known as matching.
RENDERING OF SERVICES
When an entity is involved with the provision of services, the revenue relating to a transaction is recognised in the Statement of Comprehensive Income by considering the stage of completion of the service at the Statement of Financial Position date. The result of a transaction can be estimated reliably when the following conditions are satisfied: a) Revenue can be measured reliably,
- Economic benefits will probably flow to the entity,
- The stage of completion of the transaction can be measured reliably at the Statement of
Financial Position date and
- Both the costs incurred to date and the costs to complete can be measured reliably.
If the outcome of a transaction cannot be measured reliably or there is uncertainty, revenue should only be recognised to the extent of the expenses that have been recognised that are recoverable.
INTEREST, ROYALTIES AND DIVIDENDS
Revenue is recognised on the following bases:
- Interest recognised as the effective interest method per IAS39 (not examinable at Formation 2).
- Royalties recognised on an accruals basis.
- Dividends recognised when the shareholder’s right to receive payment is established.
DISCLOSURE
An entity will make the following disclosures:
- The entity’s accounting policies for recognising revenue and determining the stage of completion of transactions involved in the provision of services.
- Revenue analysed between: (i) Sale of Goods
- Rendering of Services
- Interest
- Royalties and
- Dividends
- Amount of revenue from exchange of goods or services included in each of the categories identified in (2) above.
