FinanceBrief
23
International Adoption ‐ Revenues and Grants FinanceBriefs are issued by Accounting Policy Branch as guidance on specific accounting and reporting topics.
FinanceBriefs do not take precedence over the financial reporting regulatory framework, which encompasses the
Finance Minister’s Orders, Australian Accounting Standards and UIG Consensus Views.
•
This FinanceBrief is one in a series dealing with
the changes resulting from the adoption of
international accounting standards in Australia.
Revised Australian Accounting Standards
resulting from this process will be known as
Australian equivalents to International Financial
Reporting Standards (AEIFRSs).
•
The focus of this FinanceBrief is the expected
changes in accounting for revenues and grants.
However, this FinanceBrief is not a
comprehensive statement of all the provisions of
the relevant Standards.
The guidance issued in this FinanceBrief is
current as at the date of this document and is
presented for general guidance purposes only.
The Australian Accounting Standards Board has
finalised the AEIFRS. It is imperative,
therefore, that agencies undertake independent
regular reviews to ensure that they will comply
with the AEIFRS.
Revenue
General
AASB 118 Revenue distinguishes between
income and revenue, with revenue being a
component of income. AASB 118 deals only
with revenue.
Definitions
AASB 118 provides that:
•
income encompasses both revenue and
gains;
revenue represents “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; i ” and
gains represent increases in economic
benefits, which may or may not arise in
the course of the ordinary activities of
an entity.
Guidance provided by AASB 118 suggests that
‘ordinary activities of an entity’ encompass:
• the sale of goods;
• the rendering of services; and
• the use by others of entity assets
yielding interest, royalties and
dividends. ii
AASB 118 explains that inflows that are
collected on behalf of third parties, for example
GST, are not economic benefits that flow to the
collecting entity and hence do not result in an
increase in equity iii .
Out of Scope Items
Items out of scope of AASB 118 include: gains
from property sales; sale of property, plant and
equipment by finance lease; reversal of asset
write-downs and impairment losses; restatement of employee benefits by actuarial
assessments; and gains related to financial
instruments iv . Generally, guidance on these
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No. 23 Issued 23 August 2004
Page 1 of 3
flows is provided in the primary standard eg
gains related to financial instruments – AASB
139 Financial Instruments: Recognition and
Measurement.
sales of goods, a liability is recognised.
Attachment B lists the criteria for recognising
revenue from the sale of goods and services.
AASB 118 does not distinguish between
revenues that have been estimated or those that
have been received. Therefore if the
collectability, or probability of recovery, of an
amount recognised as revenue becomes
uncertain, that amount is recognised as an
expense, not an adjustment to revenue.
In the absence of guidance in accounting
standards for the treatment of specific inflows,
these items should be classified as gains.
Attachment A provides guidance on the
classification of common transactions out of
scope of AASB 118, or where AASB 118 is
silent.
Measurement
Sale of Goods
Goods include goods produced by the entity for
the purpose of sale, and goods purchased for
resale, such as merchandise purchased by a
retailer or land and other property held for
resale.
Revenue can only be recognised from the sale
of goods when, amongst other elements, the
significant risks and rewards of ownership have
been transferred to the buyer and the costs
incurred or likely to be incurred in the
transaction can be measured reliably.
Attachment B lists the criteria for recognising
revenue from the sale of goods and services.
AASB 118 does not distinguish between
revenues that have been estimated or those that
have been received. Therefore if the
collectability, or probability of recovery, of an
amount recognised as revenue becomes
uncertain, that amount is recognised as an
expense, not an adjustment to revenue v .
Revenue consideration received or receivable
must be measured at fair value. Where a cash or
cash equivalent inflow is deferred or the
arrangement effectively constitutes a financing
transaction, the difference between the fair
value (discounted cash flows) and the nominal
amount of the consideration is recognised as
interest revenue vii .
When revenues are subject to discounts or
rebates, the revenue must be recognised on a net
basis, with note disclosure outlining the related
discounts or rebates made viii .
Exchanges of Goods and Services
Both AASB 118 and AAS 15 Revenue outline
that an exchange or swap of goods or services
are not regarded as a transaction that generates
revenue, where they are of a similar nature and
value. In these circumstances there is also no
recognition of a gain.
Revenues and associated expenses that relate to
the same transaction or event are to be
recognised simultaneously ie in the same
reporting period. Therefore a liability for
‘unearned revenue’ is recognised when the
transaction or event expense cannot be reliably
measured. Revenue is only recognised when the
expenses can be reliably measured vi .
Rendering of Services
The rendering of services typically involves the
performance of a contractually agreed task over
an agreed period of time.
Revenue from the rendering of services can
only be recognised when, amongst other
elements, the costs incurred for the transaction
and the costs to complete the transaction can be
reliably measured. Otherwise, as per similar
However AAS 15 further requires that such
transactions must not involve any cash transfers.
This requirement is not present in AASB 118.
Therefore where an exchange or swap of goods
and/or services similar in nature and value
involves cash, the fair value of the goods or
services must be adjusted by the amount of the
cash or cash equivalent transferred. Where a
material amount of cash is involved, it should
be assumed that the goods and/or services are
not of similar value.
Government Grants to ForProfit Entities
The AASB has indicated that AASB 120
Accounting for Government Grants and
Disclosure of Government Assistance will only
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No. 23 Issued 23 August 2004
Page 2 of 3
apply to for-profit entities in Australia.
Therefore this section of the FinanceBrief only
applies to for-profit entities. Grant accounting
by not-for-profit entities is not expected to
change.
AASB 1004 is silent on whether income from
contributions is to be classified as revenue or
gains. This will depend on the circumstances of
each case.
Appropriations
Grants received by a for-profit entity must be
recognised only when there is reasonable
assurance that:
• the entity will comply with the
conditions attached to them; and
• the grants will be received. ix
International Accounting Standards do not
directly address monies appropriated by
Governments, other than grants. Pending the
outcome of Australian Exposure Draft 125
Financial Reporting by Local Governments and
future review of AASB 118, AAS 29 and AAS
31, appropriation accounting will remain subject
to AASB 1004 and the Finance Ministers
Orders (FMOs).
Such grants must be systematically recognised
as income over the periods in which the costs
they are intended to compensate are incurred x .
Until the income is recognised, granted
amounts must be recognised as a liability Unearned Revenues.
Accordingly, output appropriations in
Appropriation Bills 1 & 3 are to be classified as
revenues. Non-operating appropriations in
Appropriation Bills 2 & 4 will not generally be
recognised as income ie neither revenue nor
gains. The FMO guidance on recognition of
non-operating appropriations, including
appropriations for outputs delivered in prior
years, is not expected to change as a result of
international adoption.
Where a grant is receivable for expenses or
losses already incurred or for immediate
financial support with no future related costs,
the income must be recognised in the period in
which the grant becomes receivable. xi
Where a for-profit entity is granted a nonmonetary asset, the asset is to be recognised at
its fair value and the grant is recognised as
revenue on a systematic and rational basis over
the useful life of the asset.
Bequests and Donations
Bequests, donations and the like that can be
applied to activities associated with the ordinary
activities of the entity are to be classified as
gains. Other bequests, donations and the like
received with more specific restrictions or
conditions, such that they cannot be applied to
the activities of the entity. Such receipts do not
give rise to assets, are not to be treated as
income and must instead be disclosed in the
notes.
Contributions to Not-forProfit Entities
AASB 1004 Contributions requires not-forprofit entities to recognise non-reciprocal
transfers to the entity (‘contributions’) as
income when, and only when:
•
•
•
•
the contribution is not a contribution
by owners
the entity obtains control of the
contribution or the right to receive the
contribution;
it is probable that the economic
benefits comprising the contribution
will flow to the entity; and
the amount of the contribution can be
reliably measured.
Further Guidance
For further advice in relation to this
FinanceBrief email the Accounting Policy
Branch at accountingpolicy@finance.gov.au.
i
ii
iii
iv
Income from contributions must be measured at
the fair value of the contributions received or
receivable.
v
vi
vii
viii
ix
x
AASB 118, para 7
AASB 118, para 1
AASB 118, para 8
AASB 118, para 6
AASB 118, para 18
AASB 118, para 19
AASB 118, para 11
AASB 118, para 10
AASB 120, para 7
AASB 118, para 12
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No. 23 Issued 23 August 2004
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xi
AASB 120, para 20
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No. 23 Issued 23 August 2004
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ATTACHMENT A
INFLOWS NOT ADDRESSED BY AASB 118 REVENUE
The following are specifically excluded from the scope of AASB 118, which should nevertheless be
classified as follows:
Gains / Loss •
Changes in the value of current assets other than (a) financial instruments held for trading and
(b) gain or loss on disposal of such instruments;
•
Sale of leased assets: - AASB 117 Leases provides guidance on non-current assets sold subject
to finance leases; and
•
Recognition and changes in the fair value of biological assets related to agricultural activity: AASB 141 Agriculture.
Revenue •
Lease income: - AASB 117 Leases provides guidance on gains including the recognition of lease
income;
•
Dividends from investments accounted for under the equity method: - AASB 128 Accounting for
Investments in Associates provides guidance;
•
Changes in the fair value of financial assets and financial liabilities held for trading under AASB
139 Financial Instruments: Recognition and Measurement;
•
Insurance contracts of insurance entity’s within the scope of AASB 4 Insurance Contracts;
•
Initial recognition of agricultural produce: - AASB 141 Agriculture; and
•
The extraction of mineral ores.
AASB 118 is silent on the treatment of the following , which should nevertheless be classified as follows:
Gains / Loss •
Derecognition of non-current assets: - AASB 116 Property, Plant and Equipment applies to
inflows related to disposals, interest revenue on deferred settlements. Treatment for investment
properties is outlined below;
•
Reversal of asset revaluations: - AASB 116 Property, Plant and Equipment provides guidance
on the treatment of revaluation decrements previously booked to profit or loss;
•
Re-recognition of assets previously written-off or previously recognised as an expense;
•
Factoring of debtors;
•
Changes in accounting estimates: - AASB 108 Accounting Policies, Changes in Accounting
Estimates and Errors provides guidance in relation to estimates relating to bad debts, inventory,
financial assets and liabilities and consumption of depreciable assets.
•
Impairment: - AASB 136 Impairment of Assets provides guidance on reversals of impairment
losses;
•
Investment properties: - AASB 140 Investment Property provides guidance in relation to
retirements and disposals, changes in value, reversal of impairment losses previously booked to
profit or loss, and reclassifications; and
•
Inventory: - AASB 102 Inventories provides guidance on reversals of writedowns.
Revenue •
Appropriations for outputs (Bills 1 and 3)
•
Revenues / Resources received free of charge: - AAS 29 Financial Reporting by Government
Departments.
ATTACHMENT B
RECOGNITION CRITERIA FOR SALE OF GOODS AND RENDERING OF
SERVICES
Sale of Goods:
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. xii
(New requirement)
Rendering of Services:
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. xiii (New requirement)
Transfer of risks and rewards
If an entity retains only an insignificant risk of ownership, the transaction is a sale and revenue is
recognised. If the entity retains significant risks of ownership, the transaction is not a sale and revenue is
not recognised. Examples of situations in which the entity may retain the significant risks and rewards of
ownership are:
a)
When the entity retains an obligation for unsatisfactory performance not covered by normal
warranty provisions;
b) When the receipt of the revenue from a particular sale is contingent on the derivation of revenue
by the buyer from its sale of the goods;
c)
xii
xiii
xiv
When the goods are shipped subject to installation and the installation is a significant part of the
contract, which has not yet been completed by the entity; and when the buyer has the right to
rescind the purchase for a reason specified in the sales contract and the entity is uncertain about
the probability of return. xiv
AASB 118 para 14
AASB 118 para 20
AASB 118 paras 16 & 17