International Accounting Standards

2.  Income is defined in the Framework for the
Preparation and Presentation od Financial
Statements as increases in economic benefits
during the accounting period.
 Revenue is income that arises in the course of
ordinary activities of an entity and is referred
to by a variety of different names including
sales, fees, interest, dividends and royalties.
 The objective of this Standard is to prescribe
the accounting treatment of revenue arising
from certain types of transactions and events.

3.  Revenue includes only
the gross inflows of
economic benefits
received and receivable
by the entity on its own
account.
 Fair value is the amount
for which an asset
could be exchanged, or
a liability
settled, between
knowledgeable, willing
parties in an arm’s
length transaction.

4.  Revenue shall be measured at the fair value of
the consideration received or receivable.
 The amount of revenue arising on a transaction is
usually determined by agreement between the
entity and the buyer or user of the asset.
 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.
 When goods or services are exchanged or
swapped for goods or services which are of a
similar nature and value, the exchange is not
regarded as a transaction which generates
revenue.

5.  The recognition criteria in this Standard are
usually applied separately to each
transaction. 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.

6. 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;
c) the use by others of entity assets
yielding interest, royalties and
dividends.

7.  Revenue from the sale of goods shall be recognized
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;
(e) the costs incurred or to be incurred in respect of the
transaction can be measured reliably.

8.  When the outcome of a transaction involving the
rendering of services can be estimated
reliably, revenue associated with the transaction shall
be recognized by reference to the stage of
completion of the transaction at the end of the
reporting period. 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
end of the reporting period can be measured reliably;
(d) the costs incurred for the transaction and the costs
to complete the transaction can be measured reliably.

9.  Revenue arising from the use by others of
entity assets yielding interest, royalties and
dividends shall be recognized when:
(a) it is probable that the economic benefits
associated with the transaction will flow to
the entity;
(b) the amount of the revenue can be measured
reliably.

10.  An entity shall disclose:
(a) the accounting policies adopted for the recognition of
revenue, including the methods adopted to determine the stage
of completion of transactions involving the rendering of services;
(b) the amount of each significant category of revenue recognised
during the period, including revenue arising from:
(i) the sale of goods;
(ii) the rendering of services;
(iii) interest;
(iv) royalties;
(v) dividends; and
(c) the amount of revenue arising from exchanges of goods or
services included in each significant category of revenue.

11. The revenue recognition principle provides
that revenue is recognized:
◦ when it is earned, and
◦ when it is realized or realizable
Revenue is earned when the earnings
process is substantially complete.
Revenue is realized when goods and
services are exchanged for cash or claims to
cash.
Revenue is realizable when assets received
are convertible into a known amount of
cash.

12.  Revenue from selling products is recognized
at the date of sale (date of delivery).
 Revenue from services is recognized when
services are performed and are billable.
 Revenue from the use of enterprise’s assets
by others is recognized as time passes or as
the assets are used up.
 Revenue from disposal of assets (other than
inventory) is recognized at the point of sale
as gain or loss.

14. Revenues from manufacturing and selling are
commonly recognized at point of sale.
Exceptions:
1. Sales with buyback agreements
2. Sales when right of return exists (high rates
that are not reliably estimable)
3. Trade loading and channel stuffing

15. Revenue may be recognized before delivery
under certain circumstances.
 Long-term construction contracts are a
notable example
Two methods are available:
 The percentage-of-completion method, and
 The completed contract method

16. Revenue Recognition Before
Delivery
Long-Term Construction
Accounting Methods
Percentage-of-Completion Completed Contract
Method Method
1) Terms of contract must 1) To be used only when
be certain, enforceable. the percentage method is
2) Certainty of performance inapplicable [uncertain]
by both parties 2) For short-term contracts
3) Estimates of completion
can be made reliably

17. Percentage-of-Completion: Steps
1 Costs incurred to date = Percent complete
Most recent estimated total costs
2 Estimated total revenue x Percent complete
= Revenue to be recognized to date
3 Total revenue to be recognized to date less Revenue
recognized in PRIOR periods = Current period revenue
4 Current Period Revenue less current costs = Gross profit

18. Percentage-of-Completion: Entries
 Cost of construction:
Construction in process (CIP)
Materials, cash, payables, etc.
 Progress billings:
Accounts receivable
Billings on CIP
 Collections:
Cash
Accounts receivable