IAS 18 Revenue
Scope
This Standard shall be applied in accounting for revenue
arising from the following transactions and events:
• (a) the sale of goods;
• (b) the rendering of services; and
• (c) the use by others of entity assets yielding interest,
royalties and dividends.
Slide 1
Scope out
This Standard does not deal with revenue arising from:
• (a) lease agreements (IAS 17);
• (b) dividends arising from investments which are
accounted for under the equity method (IAS 28);
• c)
insurance contracts within the scope of IFRS 4,
Insurance Contracts;
• (d) changes in the fair value of financial assets and
financial liabilities or their disposal (IAS 39)
• (e) changes in the value of other current assets;
• (f)
initial recognition and from changes in the fair value of
biological assets related to agricultural activity
• (g) initial recognition of agricultural produce (IAS 41); and
• (h) the extraction of mineral ores.
Slide 2
Effective Dates
• This Standard becomes operative for financial statements
covering periods beginning on or after 1 January 1995.
Slide 3
Definition
• Revenue :
–“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...”
–“measured at the fair value of the consideration received
or receivable”
Slide 4
Measurement of Revenue
•Financing component of revenue :
When the arrangement effectively constitutes a financing transaction,
(e.g. an entity may provide interest free credit to the buyer or accept a note
receivable bearing a below-market interest rate from the buyer), the fair value
of the consideration is determined by discounting all future receipts using an
imputed rate of interest.
180 days
To be paid in
Sales date
180 days
Nominal amount : 100$
Discounted amount : 95$
Interest income : 5$
Discounted at
market rate
Slide 5
Sale of Goods
• Revenue from the sale of goods shall be recognised when
all the following conditions have been satisfied:
(a) the entity has transferred to the buyer the significant risks and
rewards of ownership of the goods;
(b) the entity retains neither continuing managerial involvement to the
degree usually associated with ownership nor effective control
over the goods sold;
(c)
the amount of revenue can be measured reliably;
(d) it is probable that the economic benefits associated with the
transaction will flow to the entity; and
(e) the costs incurred or to be incurred in respect of the transaction
can be measured reliably.
Slide 6
Rendering of Services
When the outcome of services rendered can be estimated
reliably, revenue shall be recognised by reference to the
stage of completion at the balance sheet date.
The outcome of a transaction can be estimated reliably
when all the following conditions are satisfied:
(a) the amount of revenue can be measured reliably;
(b) it is probable that the economic benefits associated with the
transaction will flow to the entity;
(c) the stage of completion of the transaction at the balance sheet
date can be measured reliably; and
(d) the costs incurred for the transaction and the costs to complete the
transaction can be measured reliably.
Slide 7
Interest, Royalties and Dividends
(a) interest shall be recognised using the effective interest method
as set out in IAS 39, paragraphs 9 and AG5–AG8;
(b) royalties shall be recognised on an accrual basis in accordance
with the substance of the relevant agreement; and
(c) dividends shall be recognised when the shareholder's right to
receive payment is established (e.g. Formal approval of
shareholders rather than expectation of management)
Slide 8
Measuring Revenue "Gross" Or "Net“
• In an agency relationship, "gross" amounts collected by the agent on behalf of
the principal are not benefits that flow to the agent and, therefore, are not
revenue.
• The agent's revenue is the "net" amount of the commission.
INDICATORS OF AGENT
• The supplier (and not the seller) is the primary obligor in the arrangement.
• The seller earns a fixed or determinable amount.
• The supplier (and not the seller) has credit risk.
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MEASURING REVENUE "GROSS" OR "NET“
INDICATORS OF PRINCIPAL :
• Is the primary obligor in the arrangement.
• Has general inventory risk (before the customer order is placed or on
customer return).
• Has latitude in establishing price.
• Changes the product or performs part of the service.
• Has discretion in supplier selection.
• Is involved in determining product or service specifications.
• Has physical loss inventory risk (after the customer order or during
shipping).
• Has credit risk.
• Is responsible for warranty or quality risk on the product(s) sold or
service(s) rendered.
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SALES ARRANGEMENTS IN WHICH THE SELLER
HAS PARTIALLY PERFORMED ITS OBLIGATIONS
Q: Does failure to deliver one item or to perform one service
specified by a sales arrangement preclude the immediate
recognition of any revenue for that sales arrangement?
A: No. Revenue from the sales arangement may be
recognised in full if the remaining obligation is
inconsequential or perfunctory. Costs to complete shall be
reliably estimable and accrued for.
Slide 11
SALES ARRANGEMENTS IN WHICH THE SELLER
HAS PARTIALLY PERFORMED ITS OBLIGATIONS
Not Inconsequential - Perfunctory if :
• Essential to functionality of delivered item (e.g. installation, training)
• Faliure to complete would result in customer’s rejection or right to refund
• No history of timely completion or reliable estimate of costs by seller
• Historically, cost to complete varied significantly
• Sources required to complete are specialized and are not readily
available in the market.
• Cost to complete is more than insignificant compared to total fee / profit.
Slide 12
UP-FRONT FEES
Upfront fee is recognised as revenue over the life of the agreement if :
•The fee is not in exchange for products delivered or services performed
•The fee is negotiated in conjunction with the pricing of other elements
•Customer would ascribe a lower value or no value to the upfront fees in
the absence of the performance of other elements of the arrangement
•The vendor does not sell the initial right or activities seperately.
Slide 13
GOODS SHIPPED FOB SHIPPING POINT BUT SELLER
Insured by
ARRANGES SHIPPING
Company A
Assumed risk
during shipment
Company A
FOB Shipping Point
May Company A recognise revenue once its products have been shipped?
No. While title has passed, Company A has retained a significant risk of
ownership. The fact that Company A's insurance would cover a
substantial loss is evidence that it has managed its risk, but Company A
has still retained the risk.
Slide 14
GOODS SHIPPED FOB DESTINATION BUT SHIPPING
COMPANY ASSUMES RISK
Company A
FOB Destination
May Company A recognise revenue once its products have been shipped?
No. While Company A has managed its risk, it has not transferred tisk to
the buyer.
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UNLIMITED RIGHT OF RETURN
Q: Company A distributes VCDs and DVDs and allows key customers to return
any slow-moving stock. The returns could result in replacement with other VCDs
and DVDs or return of cash. Company A is able to make a reliable estimate of the
amount of returns.How should Company A account for its revenues?
A: The entity has transferred to the buyer the significant risks and rewards of
ownership. Revenue should be recognised on initial delivery of the goods in an
amount that reflects a reduction for the estimated amount to be returned.
Slide 16
RETENTION OF TITLE
Non-cancellable purchase order
Company A
Title is witheld
until payment
Customer
May Company A recognise revenue once its products have been shipped?
A : If a seller retains legal title “solely to protect the collectibility of the amount due”,
revenue recognition is not precluded.
Slide 17
CUSTOMER ACCEPTANCE PROVISION
Delivery
Production
Customer Acceptance
Collection
-Only if the probability of nonRecognize revenue at delivery with a
provision for estimated returns?
acceptance can be reliably
estimable based on historical data.
OR?
-Otherwise wait until earlier of
Wait until acceptance?
acceptance and expiry of
acceptance period.
Slide 18
LAY AWAY SALES (ÖN ÖDEMELİ SATIŞLAR)
Company A
Total price :$2000
Upfront paid: $1200
Delivery is witheld until final payment
• Company Z's lay away policy requires that customers put down at least
25 per cent of the sales price as an up-front, non-refundable deposit.
Once a deposit is received, Z identifies the product to be sold and
segregates it in its warehouse.
• Company Z's experience with lay away sales is that most sales are
consummated with an average six-month lay away period before the
customer pays the entire sale amount.
• How should Company Z account for the deposit received?
Slide 19
LAY AWAY SALES
Revenue is recognized when a "significant" deposit is
received. The determination of whether a deposit is
considered significant is a matter of careful judgment, based
on all of the relevant facts and circumstances.
In any case, the final conclusion should be supported by
sufficient objective evidence.
In this case, the deposit is significant, and therefore,
Company A would recognise the sale for the home theatre
for $2,000 in November 2001, with a receivable for $800.
Slide 20
REVENUE RECOGNITION: "TRADE LOADING" AND
"CHANNEL STUFFING"
Sometimes manufacturers or dealers try to enhance the apparent
volume of their sales, profits, and/or market share by inducing their
wholesale customers to buy more product than they can promptly resell.
The result is accelerated, but not increased, volume, because the
wholesalers' inventories become bloated and their future orders from the
manufacturers are reduced. This practice is known as "trade loading" or
"channel stuffing".
How is revenue recognised in the case of trade loading or channel
stuffing?
If the revenue recognition criteria in IAS 18.14 for sales of goods are
met, the revenue should be recognised. Revenue is recorded net of the
expected returns. Therefore, management must estimate the amount of
product to be returned.
Slide 21
BILL AND HOLD SALES
Non-cancellable purchase order
Customer
Company A
Delivery is delayed on customer’s
request
Revenue can only be recognized only if the following are met :
– Delivery is probable
– Item is identified and ready for delivery
– Buyer specifically acknowledges the deferred delivery instructions
– Usual payment terms apply
– Buyer must have a substantial business purpose for bill and hold basis
Slide 22
SALE WITH A BUYBACK AGREEMENT/OPTION
Title is transferred at
delivery
Sold for 50m$ - agreed to buyback at 60m$
Company A
Bought back for
60m$
Should Company A recognise revenue and cost of goods sold at the time of delivery?
A : No. Company A has not transferred to the buyer the significant risk and
reward of ownership. Transaction is in the nature of a financing arrangement.
Slide 23
SALE WITH A BUYBACK AGREEMENT/OPTION
Company A is
A : a) Company A retains benefit of ownership (ability to profit from price
difference). If significant, revenue should not be recognised until expiration.
b) If A had the right to buy back at market price and the goods are readily
available in the market, revenue is recognized at the time of delivery.
Slide 24
SALES WHERE THERE ARE SEPERATELY IDENTIFIABLE
COMPONENTS
Q : Company Z operates a chain of supermarkets and they have just launched
their campaign for the month of Ramadan. The campaign includes a fixed price of
240 TL for a Ramadan pack which includes an assortment of different food
products, an alarm clock, 5 time free car washing service from the car washing
centers operated next to the supermarkets (the car washing service is owned by
Company Z) and cell phone top up card for 1,000 minutes to be used in the mobile
virtual network operated by Company Z.
How should Company account for the 240 TL received from the customers
of this campaign?
A: IAS 18 paragraph 13 requires to apply the recognition criteria to the separately
identifiable components of a single transaction in order to reflect the substance of
the transaction.
As a result, Company Z would have to divide this pack to separately identified
components and recognise revenue separately for every component by applying
appropriate recognition criteria.
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