IAS 18 provides guidance on accounting for revenue. It defines revenue as the gross inflow of economic benefits during an accounting period from ordinary activities. Revenue is recognized when it is probable future economic benefits will flow to the entity and these benefits can be measured reliably. Revenue is measured at the fair value of consideration received, taking into account the stage of completion for services and the transfer of risks and rewards of ownership for goods. The standard also provides disclosure requirements around revenue recognition policies and accounting estimates.

1. REVENUE IAS 18

2. OBJECTIVE

3. Revenue arising from Sale of goods Produced for sale Purchased for resale Rendering of services Performance of contractually agreed task over agreed period Interest, royalties and dividends from use of assets Interest: charges for use of cash & cash equivalents Royalties: charges for use of long term assets (patents, trademarks, copyright & software i.e. intangible assets) Dividends: profit distribution to equity investors in proportion to holding of class of capital SCOPE

4. Services related directly to construction contracts (IAS 11) Project managers and architects Leases (IAS 17) Dividends from Investment in Associates (IAS 28) Insurance contracts (IFRS 4) Profit on disposal & changes in fair value of financial assets & liabilities (IAS 39) Changes in fair value of current assets Initial recognition & changes in FV of biological assets in agricultural activity Initial recognition of agricultural produce Extraction of mineral ores SCOPE: Income not covered by IAS18

5. Revenue: gross inflow of economic benefits during the period in the course of ordinary activities resulting in increases in equity Fair value: amount for which an asset could be exchanged or liability settled between knowledgeable, willing parties in arm’s length transaction. Excludes amounts collected on behalf of third parties DEFINITIONS

6. MEASUREMENT OF REVENUE

7. When payment is deferred, fair value may be less than nominal amount received In a financing transaction, fair value = discounted future receipts at imputed rate of interest Prevailing rate for similar instrument & credit rating Rate that discounts nominal amount to current cash price FV – nominal amount = interest revenue Swapping goods does not generate revenue unless Goods and services are dissimilar Measure at fair value of goods & services received less cash transferred If not reliable, use fair value of goods & services given up Measurement of Revenue

8. Separate some transactions into separately identifiable components Defer identifiable amount for subsequent servicing Recognise revenue over period in which service is performed Recognise sale and repurchase of the same product as one transaction IDENTIFICATION OF THE TRANSACTION

9. SALE OF GOODS

10. Examine the transaction Identify transfer of legal title or passing of possession Sale not recognised if significant risks and rewards of ownership are retained: Obligation for unsatisfactory performance not covered by normal warranty Consignment stock sold – receipt contingent on sale by buyer Sale contingent on installation not yet complete Buyer retains right to return goods specified in contract Sale recognised when insignificant risk retained Retain legal title but transfer all other risks & rewards Refund available to unsatisfied buyers and provision for returns is made based on previous experience Probable future economic benefit No major uncertainties at time of recognition Major uncertainty arising after recognition recognised as bad debt expense Match revenue with associated expenses When associated expense cannot be measured reliably, recognise receipts as a liability Sale of goods

11. RENDERING OF SERVICES

12. When to recognise revenue

13. Parties have agreed When can the outcome of a transaction be reliably estimated? Probable economic benefits can be measured reliably

14. Revenue is recognised in the period of service performed Uncollectable revenue is recognised as bad debt expense Measure the stage of completion at the balance sheet date and revise at each balance sheet date Do not use progress payments or advances received Calculate stage of completion by reference to Survey reports (construction sites) Service to date/total service to be performed Costs incurred to date/estimated total costs Match costs to services performed in accounting periods Stage of completion

15. Revenue contingent on performance of specific significant acts is deferred until the acts are performed Revenue for a number of services over a specific period is spread on a straight- line basis Where the outcome of the transaction is not reliable, recognise revenue to the extent of recoverable costs only (no profit) Where not probable that costs will be recovered, recognise only expenses (no revenue) When uncertainties cease, recognise stage of completion of revenue (including profit if applicable) Spreading of revenue

16. Interest, Royalties & Dividends Recognise revenue when Economic benefits are probable Amounts can be measured reliable Interest IAS39 paragraph 9 effective interest method Royalties Accrual basis according to substance of agreement Dividends In period when shareholders ‘ rights to earn dividend is established (not AP when profit is earned)

17. Revenue from significant categories recognised in AP Sale of goods Rendering of services Interest Royalties Dividends Accounting policies and methods adopted to determine stage of completion Revenue from exchanges of goods or services in each significant category Contingent assets and liabilities from Warranty costs Claims Penalties Possible losses DISCLOSURE

18. Revenue is recognised at fair value Revenue is recognised when risks and rewards of ownership are transferred Revenue is recognised in the period of service performed Revenue is recognised in accordance with the economic substance of agreement rather than legal form Revenue is recognised when economic benefits are probable and can be measured reliably Revenue can be measured reliably when parties have agreed terms of sale and rights have become enforceable Revenue is deferred when contingent on future performance Revenue and related expenses are recognised in profit or loss in the same period (matched) SUMMARY