REVENUE

IAS 18

OBJECTIVE

Revenue arising from Sale of goods

Produced for salePurchased for resale

Rendering of servicesPerformance of contractually agreed task over

agreed periodInterest, royalties and dividends from use of

assetsInterest: charges for use of cash & cash

equivalentsRoyalties: charges for use of long term assets

(patents, trademarks, copyright & software i.e. intangible assets)

Dividends: profit distribution to equity investors in proportion to holding of class of capital

SCOPE

Services related directly to construction contracts (IAS 11)Project managers and architects

Leases (IAS 17)Dividends from Investment in Associates (IAS 28)Insurance contracts (IFRS 4)Profit on disposal & changes in fair value of financial

assets & liabilities (IAS 39)Changes in fair value of current assetsInitial recognition & changes in FV of biological assets in

agricultural activityInitial recognition of agricultural produceExtraction of mineral ores

SCOPE: Income not covered by IAS18

Revenue: gross inflow of economic benefits during the period in the course of ordinary activities resulting in increases in equity

Fair value: amount for which an asset could be exchanged or liability settled between knowledgeable, willing parties in arm’s length transaction.

Excludes amounts collected on behalf of third parties

DEFINITIONS

Agreement between seller &

buyer

Less trade discounts &

volume rebates

Discount future receipts @

imputed rate of interest

Fair value – nominal receipt

= interest revenue IAS 39

Fair value of consideration

receivable

MEASUREMENT OF REVENUE

When payment is deferred, fair value may be less than nominal amount received

In a financing transaction, fair value = discounted future receipts at imputed rate of interestPrevailing rate for similar instrument & credit ratingRate that discounts nominal amount to current cash priceFV – nominal amount = interest revenue

Swapping goods does not generate revenue unlessGoods and services are dissimilarMeasure at fair value of goods & services received less

cash transferred If not reliable, use fair value of goods & services given up

Measurement of Revenue

Separate some transactions into separately identifiable components

Defer identifiable amount for subsequent servicing

Recognise revenue over period in which service is performed

Recognise sale and repurchase of the same product as one transaction

IDENTIFICATION OF THE TRANSACTION

Transfer risks & rewards of

ownership

No management or control over

sold goods

Revenue measured

reliably

Probable economic benefits

Costs measured reliably

SALE OF GOODS

Examine the transaction Identify transfer of legal title or passing of possession Sale not recognised if significant risks and rewards of ownership are retained:

Obligation for unsatisfactory performance not covered by normal warranty Consignment stock sold – receipt contingent on sale by buyer Sale contingent on installation not yet complete Buyer retains right to return goods specified in contract

Sale recognised when insignificant risk retained Retain legal title but transfer all other risks & rewards Refund available to unsatisfied buyers and provision for returns is made based on

previous experience Probable future economic benefit

No major uncertainties at time of recognition Major uncertainty arising after recognition recognised as bad debt expense

Match revenue with associated expenses When associated expense cannot be measured reliably, recognise receipts as a

liability

Sale of goods

Measure reliably

Probable Parties agree to

Stage of completion

Recognise revenue

Revenue Economic Benefits

Enforceable rights

Surveys Period of service

Stage of completion

Consideration to be exchanged

Service to date/total service

Bad debt as expense

Costs incurred

Manner & terms of settlement

Costs incurred/total costs

Defer contingent revenue

Costs to complete service

Match to service performed in AP

Straight line over specific period

RENDERING OF SERVICES

Outcome of transaction can

be estimated reliably

Recognise revenue according to stage

of completion

Measure stage of completion at balance sheet

date

When to recognise revenue

Parties have agreedConsideratio

n to be exchanged

Enforceable rights

Revenue

Costs incurre

d

Stage of

comple-tion

Costs to

complete

When can the outcome of a transaction be reliably estimated?

Probable economic benefits can be measured reliably

Revenue is recognised in the period of service performed

Uncollectable revenue is recognised as bad debt expense

Measure the stage of completion at the balance sheet date and revise at each balance sheet dateDo not use progress payments or advances received

Calculate stage of completion by reference to Survey reports (construction sites)Service to date/total service to be performedCosts incurred to date/estimated total costs

Match costs to services performed in accounting periods

Stage of completion

Revenue contingent on performance of specific significant acts is deferred until the acts are performed

Revenue for a number of services over a specific period is spread on a straight- line basis

Where the outcome of the transaction is not reliable, recognise revenue to the extent of recoverable costs only (no profit)

Where not probable that costs will be recovered, recognise only expenses (no revenue)

When uncertainties cease, recognise stage of completion of revenue (including profit if applicable)

Spreading of revenue

Interest, Royalties & DividendsRecognise revenue

whenEconomic benefits

are probableAmounts can be

measured reliable

Interest IAS39 paragraph 9

effective interest methodRoyalties

Accrual basis according to substance of agreement

Dividends In period when

shareholders ‘ rights to earn dividend is established (not AP when profit is earned)

Revenue from significant categories recognised in AP Sale of goods Rendering of services Interest Royalties Dividends

Accounting policies and methods adopted to determine stage of completion

Revenue from exchanges of goods or services in each significant category

Contingent assets and liabilities from Warranty costs Claims Penalties Possible losses

DISCLOSURE

Revenue is recognised at fair valueRevenue is recognised when risks and rewards of ownership

are transferredRevenue is recognised in the period of service performedRevenue is recognised in accordance with the economic

substance of agreement rather than legal formRevenue is recognised when economic benefits are probable

and can be measured reliablyRevenue can be measured reliably when parties have agreed

terms of sale and rights have become enforceableRevenue is deferred when contingent on future performance Revenue and related expenses are recognised in profit or

loss in the same period (matched)

SUMMARY