IAS 18


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IAS 18

  1. 1. IAS 18: Revenue Roshankumar Pimpalkarroshankumar.2007@rediffmail.com
  2. 2. The objective of IAS 18 is to prescribe the accounting treatment for revenue arisingfrom certain types of transactions and events.Revenue is recognised when it is probable that the future economic benefits will flowto the enterprise and those benefits can be measured reliably and when certainspecific criteria are met depending on whether the revenue is from sale of goods,rendering of services or consist of interest, royalties or dividends.IAS 18 does not deal with the revenue arising from: Lease agreements (IAS 17) Dividends arising from investments that are accounted for under equity method Insurance contract within the scope of IFRS 4: Insurance Contracts Changes in the fair value of financial assets and liabilities or their disposal (IAS 39: Financial Instruments: Recognition and Measurement) Changes in the value of other current Assets Initial recognition and from changes in the fair value of biological assets related to agricultural activity (IAS 41: Agriculture) Initial recognition of agricultural produce (IAS 41: Agriculture) The extraction of mineral ores.Measurement of RevenuesRevenue should be measured at the fair value of consideration received orreceivable, taking into account the amount of trade discounts, volume rebates andtime value of money. Nevertheless, when an uncertainty arises about thecollectability of an amount already included in the revenue, the following arerecognised an expense: The uncollectable amount, or The amount in respect of which the recovery has ceased to be probableThey are treated as an expense, rather than an adjustment to the amount of revenuewhich has already been recognised.Financing TransactionWhen the arrangement effectively constitutes a financing transaction the differencebetween the fair value and nominal amount of consideration should be recognised asinterest revenue.The fair value of consideration should be determined by discounting all the futurereceipts, using an imputed rate of interest.The imputed rate of interest is more clearly determinable of either: The prevailing rate for a similar instrument of an issuer with a similar credit rating; or A rate of interest that discounts the nominal amount of the instrument to the current cash sales price of the goods or services.Exchange of Goods or Services If goods or services are exchanged for goods or services that are of similar nature and value, the exchange is not regarded as transaction that generates revenue.roshankumar.2007@rediffmail.com
  3. 3. If the goods are sold or services are rendered in exchange for dissimilar goods or services, the exchange is regarded as transaction that generates revenue and it’s measured at the fair value of goods or services received adjusted by the amount of any cash or cash equivalents transferred. However when the fair value of goods or services received cannot be measured reliably, the revenue should be measure at the fair value of goods or services given up adjusted by the amount of any cash or cash equivalents transferred.How to recognise the revenue when the transaction includes multiple elements?Single transactionIt is necessary to apply the recognition criteria to the separately identifiablecomponents of a single transaction in order to reflect the substance of thetransaction. For example when the selling price of a product includes an identifiableamount for subsequent servicing, that amount is deferred and recognise as revenueover the period during which service is performed.Series of transactionThe recognition criteria must be applied to two or more transactions together whenthey are linked in such a way that the commercial effect cannot be understoodwithout reference to the series of transaction as a whole. For example an enterprisesales goods and at the same time, enters into a separate agreement to repurchasethem at a later date.Sale of GoodsRevenue from the sale of goods should be recognised when all the five of thefollowing conditions have been satisfied: The enterprise has transferred to the buyer the significant risks and rewards of ownership of the goods (transfer of legal title or passing of possession to the buyer) The enterprise retains neither continuing managerial involvement to the degree usually associated with the ownership, nor effective control over the goods sold The amount of revenue can be measured reliably It is probable that the economic benefits associated with the transaction will flow to the enterprise The cost incurred or to be incurred in respect of the transaction can be measured reliablyExample 1:A person acquires a second hand car and will pay for the car over a set period oftime. The seller retains legal title until the buyer has settled the outstanding debt. Inroshankumar.2007@rediffmail.com
  4. 4. this situation the buyer enjoys the risks and rewards of ownership even though legaltitle has not yet transferred.Example 2:Heres a situation related to shipping conditions. Revenue should be recogniseddepending on when the acquirer accepts the risks and rewards of the productacquired. In these circumstances, shipping terms are a key indicator to identify thetransfer or risks. For example, free onboard (FOB) Shipping Point generallymeans that the purchaser accepts the risks and rewards of ownership when thegoods are shipped from the seller (i.e. they are still in transit). Carriage in freight(CIF) or FOB Destination generally means that the purchaser only accepts the risksand rewards of ownership when the goods have arrived at the port in the countrywhere the purchaser is based. It is therefore very important to understand theimplications of all terms in a contract.Product ReturnWhen the customer has the option to return the goods Revenue would berecognised provided: The goods have been delivered and the seller can reliably estimate future returns and recognise a liability for return based on previous experience and other relevant factors; OR Where there is uncertainty about return and the shipment has been formally accepted by the buyer or the goods have been delivered and the time for return has elapsed.Bill and Hold SalesThese are sales in which delivery is delayed at the buyer’s request but the buyertakes title and accepts billing. In these circumstances revenue is recognized whenthe buyer takes title, provided: it is probable that delivery will be made; the item is on hand, identified and ready for delivery to the buyer at the time the sale is recognized; the buyer specifically acknowledges the deferred delivery instructions; and The usual payment terms apply.Revenue is not recognized when there is simply an intention to acquire ormanufacture the goods in time for delivery.Customer loyalty programmesCustomer loyalty programmes are used by entities to provide customers withincentives to buy their goods and services, whereby the entity grants the customeraward credits when buying goods or services.roshankumar.2007@rediffmail.com
  5. 5. Customers may be required to accumulate a specified minimum number of awardcredits before they are able to redeem them. The entity may operate the customerloyalty programme itself or participate in a programme operated by a third party.Award credits are accounted for as a separately identifiable component of the salestransactions in which they were granted. It is important to note that IFRIC 13 onlyapplies to situations where award credits are granted as part of a sales transactionand does not apply to situations where award credits are granted for free outside of asales transaction, e.g. vouchers are handed out in the street. Consideration received or receivable from a sales transaction as part of a customer loyalty programme is allocated to the award credits granted by reference to their fair value, i.e. the amount for which they could be sold separately. The amount of revenue recognised is based on the number of awards that have been redeemed relative to the total number expected to be redeemedWhen a third party supplies the awards, the entity has to assess whether it iscollecting the consideration for its own account or as an agent on behalf of the thirdparty.One feature indicating that an entity is acting as an agent is that the amount theentity earns is predetermined, being either a fixed fee per transaction or a statedpercentage of the amount billed to the customer. If it is an agent, it measuresrevenue as the net amount retained for its own account when the third partybecomes obliged to supply the awards and entitled to receive consideration.An entity is acting as a principal when it has exposure to the significant risks andrewards associated with the sale of goods or the rendering of services. Features thatindicate that an entity is acting as a principal include when the entity:a) has the primary responsibility for providing the goods or services to the customeror for fulfilling the order;b)has inventory risk before or after the customer order, during shipping or on return;c)has latitude in establishing prices, either directly or indirectly; andd)bears the customer’s credit risk for the amount receivable from the customer.If it is a principal, the entity will recognise revenue for the gross considerationallocated to the award credits when it fulfills its obligation in respect of the awards.The entity will separately recognise the cost payable to the third party for the deliveryof the award credits.ServicesRevenue associated with a transaction for the rendering of services should berecognised by reference to the stage of completion of the transaction at the reportingdate, when the outcome can be estimated reliably. This occurs when all of thefollowing conditions are satisfied:roshankumar.2007@rediffmail.com
  6. 6. the amount of revenue can be measured reliably it is probable that the economic benefits associated with the transaction will flow to the enterprise the stage of completion of the transaction at the reporting date can be measured reliably the costs incurred for the transaction and the costs to complete the transaction can be measured reliablyThe recognition of revenue, by reference to the stage of completion of a transaction,is often referred to as the percentage of completion method. Under this method,revenue is recognised in the accounting periods in which the services are rendered.The stage of completion of a transaction may be determined by a variety of methods,such as: A survey of work performed. Services performed to date as a percentage of total services to be performed. The proportion that costs incurred to date bear to the estimated total costs of the transaction. Only costs that reflect services performed to date are included in costs incurred to date. Only costs that reflect services performed or to be performed are included in the estimated total costs of the transaction.It is important to note that progress payments and advances received fromcustomers often do not reflect the services performed.The recognition of revenue from the initiation fees depends on the nature of theservices provided. The appendix to IAS 18 states, "Revenue recognition depends onthe nature of the services provided. If the fee permits only membership, and all otherservices or products are paid for separately, or if there is a separate annualsubscription, the fee is recognised as revenue when no significant uncertainty as toits collectibility exists. If the fee entitles the member to services or publications to beprovided during the membership period or to purchase goods or services at priceslower than those charged to non-members, it is recognised on a basis that reflectsthe timing, nature and value of the benefits provided."Installation fees are recognised as revenue by reference to the stage ofcompletion of the installation, unless they are incidental to the sale of a product, inwhich case they are recognised when the goods are sold.Interest, royalties and dividendsRevenue arising from the use by others of enterprise assets yielding interest,royalties and dividends should be recognised when: its probable that the economic benefits associated with the transaction will flow to the enterprise and the amount of the revenue can be measured reliablyroshankumar.2007@rediffmail.com
  7. 7. Interest shall be recognised using the effective interest method as set out in IAS 39Financial Instruments: Recognition and Measurement.Royalties shall be recognised on an accrual basis, in accordance with the substanceof the relevant agreement. That is:- any royalties that are certain to be paid are recorded as revenue as soon as theseller has performed, by transferring the associated rights to the buyer;- any incremental royalties are recognised as revenue as the buyer becomes obligedto pay.Dividends shall be recognised when the shareholders right to receive payment isestablished.roshankumar.2007@rediffmail.com