Ahmad Ismail
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What is IAS 18 Revenue?
Measurement of revenue
Recognition of revenue
Identification of transaction
Income definition per framework :
 Increases economic benefits
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assets /
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=
liabilities
equity ( other than contribution )
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Income includes Revenue & Gains
Revenue – ordinary activity of business
Gains – not ordinary , profit on sale
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Gross inflow economic benefit (cash, receivables,
other assets)
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During the period
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Ordinary activity
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other than increases relating to contributions from
equity participants.
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Chain of 10 bicycle shops sells new and used bicycles
and rents bicycles. This year it sold the land and
building for one of its shops, which was closed.
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It has 3 types of revenue: Sale of new bikes, Sale
of used bikes, and Rentals.
The proceeds from selling the land and building
are not revenue (not ‘ordinary’); instead, this is
presented net as a gain or loss.
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Revenue is usually determined by agreement between
the entity and the buyer or user of the asset.
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Revenue is measured at the fair value taking into
account the amount of any trade discounts and
volume rebates allowed by the entity.
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Fair value is the amount for which an asset could be
exchanged between willing parties in a transaction.
Fair value of consideration
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Delayed payment (deferral, discounting,
collection risk)
 Exchanges/barter transactions
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Similar items - no revenue
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Otherwise dissimilar - fair values
 Agent/principal relationship
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Amounts collected on behalf of principal are not
revenue
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Revenue = commission
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1.
The entity has substantially performed what is
required in order to earn income
2.
The amount of income can be reliably measured
3.
The related assets received can readily be converted
to cash or claims for cash
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Revenues are recognized to the extent that it is
probable that economic benefits will flow to the entity
and the amount of revenue can be measured reliably.
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Revenues are stated net of discounts, allowances and
returns.
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During production
At completion of production
Time of sale
Over period receivables outstanding
At the time cash is collected
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We sell goods costing 1,500,000 for 2,000,000 due in
2 years interest free. Current cash price would have
been 1,652,893.
◦ Financing transaction. Up front revenue is
1,652,893. Profit is 152,893.
◦ PV = (FV) / ((1+int)^periods)
◦ 1,652,893 = (2,000,000) / ((1+int)^2)
◦ Int = 10 (10%) by solving the equation
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Example, continued:
◦ Interest income year 1 = 1,652,893 x 10% =
165,289, unpaid, bringing receivable up to
1,818,182.
◦ Interest income year 2 = 1,818,182 x 10% =
181,818, bringing receivable up to
2,000,000, which is then repaid
1 Jan 01
Account receivable
Revenue
31 Dec 01 Account receivable
Interest revenue
31 Dec 02 Account receivable
1,652,893
1,652,893
165,289
165,289
181,818
Interest revenue
31 Dec 02
Cash
Account receivable
181,818
2,000,000
2,000,000
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IAS 18 specifies revenue recognition criteria for 3 basic
revenue generating scenarios:
1)
Sale of goods
2)
Rendering of services
3)
Interest, Royalties and Dividends
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The recognition criteria are usually applied separately
to each transaction.
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In certain circumstances, it is necessary to apply the
recognition criteria to the separately identifiable
components of a single transaction in order to reflect
the substance of the transaction.
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When the selling price of
a product includes
amount for subsequent
servicing, that amount is
deferred and recognized
as revenue over the
period during which the
service is performed.
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The recognition criteria
are applied to two or
more transactions
together when they are
linked in such a way that
the commercial effect
cannot be understood
without reference to the
series of transactions as
a whole.
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1.
2.
3.
4.
5.
Revenue should only be recognized when all of the
following conditions are satisfied :
transferred the significant risks and rewards of ownership
of the goods to the buyer
The seller no longer has management involvement or
effective control over the goods
The amount of revenue can be measured reliably,
It is probable that the economic benefits associated with
the transaction will flow to the entity
The costs incurred in respect of the transaction can be
measured reliably
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Examine the circumstances of the individual
transaction.
In most cases, the transfer of the risks and rewards of
ownership coincides with the transfer of the legal title
or the passing of possession to the buyer.
Common for most retail sales
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1.
2.
3.
4.
The outcome of a transaction can be measured reliably
when all of the following conditions are met:
The amount of revenue can be measured reliably;
It is probable that economic benefits associated with
the transaction will flow to the entity;
The stage of completion of the transaction at the end
of the reporting period can be measured reliably;
The costs incurred for the transaction and the costs to
complete the transaction can be measured reliably.
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Example: Security firm receives 10,000 to respond to
alarms for 2-year period
◦ Service contract stage of completion is even
over two years. 10,000 / 24 = 417 revenue
recognized per month.
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Revenue is recognized only when the economic
benefits associated with the transaction will flow to
the entity.
Reliable estimates after it has agreed to the following
with the other parties to the transaction:
each party’s enforceable rights regarding the service to
be provided and received by the parties
the consideration to be exchanged
the manner and terms of settlement.
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In most cases, the consideration is in the form of cash
or cash equivalents and the amount of revenue is the
amount of cash or cash equivalents received or
receivable.
However, when the inflow of cash or cash equivalents
is deferred, the fair value of the consideration may be
less than the nominal amount of cash received or
receivable. For example, an entity may provide
interest-free credit to the buyer or accept a note
receivable bearing a below-market interest rate from
the buyer as consideration for the sale of goods.
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Amounts collected on behalf of third parties
such as sales taxes, goods and services taxes and value
added taxes
They are not economic benefits which flow to the
entity and do not result in increases in equity.
1.
Interest revenue should be recognised on the effective
interest’ basis.
2.
Dividend when the right to receive payment is established.
Often this does not happen in the case of dividends until the
shareholder actually receives the dividend.
3.
Royalties should be recognised on an accruals basis in
accordance with amounts receivable as a result of ‘asset use’
up to the reporting date.
Example: We buy zero coupon bond for 100,000,
redeemable at 134,010 in 6 years.
•PV = (FV) / ((1+int)^periods)
100,000 = (134,010) / ((1+int)^6) → int = 5%
Year
Interest at 5% x Receivable
Bond Receivable
Debit Bond, Credit Int. Revenue
100,000
1
5,000
105,000
2
5,250
110,250
3
5,513
115,763
4
5,788
121,551
5
6,078
127,629
6
6,381
134,010
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Standard IAS 18 undergoes major revision as a part of
the convergence project between IASB (setter of IFRS)
and FASB (setter of US GAAP).
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The new IAS 18 is expected to be applicable from 1
January 2017 or later.
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So the current IAS 18 in the financial statements will
stay in force till 1 January 2017.