Accounting theory discussion on revenue

1. LECTURE 9
REVENUE
ARTHIK DAVIANTI, SE. MSI. AK. CA.

2. REVENUE DEFINED
Revenue is the gross inflow of economic
benefit during the period arising in the
course of the ordinary activities on an entity
when those inflows result in increase in
equity, other than increases relating to
contributions from equity participants
IAS 18/AASB 118

3. REVENUE DEFINED
Income is increases in economic benefits
during the accounting period in the form of
inflows or enhancements of assets or
decreases of liabilities that result in
increases in equity, other than those relating
to contributions from equity participants.
AASB Framework

4. REVENUE DEFINED
Revenues are inflows or other enhancement
of assets or an entity or settlements of its
liabilities (or a combination of both) during
a period from delivering or producing
goods, rendering services, or other
activities that constitute the entity’s on
going major or central operation
FASB Framework

5. REVENUE DEFINED
PSAK No.23: “
Kenaikan manfaat ekonomi selama suatu
periode akuntansi dalam bentuk pemasukan
atau penambahan aset, atau penurunan
liabilitas yang mengakibatkan kenaikan
ekuitas yang tidak berasal dari kontibusi
penanam modal”

6. REVENUE DEFINED
Revenue represents a physical and a monetary
flow
Revenue is an inflow of economic benefits
Revenue forms part of income – which also
includes gains – and arises in the course of
ordinary activities
Examples are sales, fees, interest, dividends,
royalties and rents

7. REVENUE DEFINED
IASB encompasses both revenue and gains
(Framework para 74)
Gains represent future economic benefit – not
considered as a separate element (Framework
para 75)
FASB differentiates revenues and gains
Gains – other than sale, increase in net assets:
1. From ‘peripheral/incidental transaction’
2. May be largely beyond the control of the firm

8. BEHAVIOURAL VIEW OF REVENUE
Revenues are the result of firm activity
Net accomplishment of firm
 revenue = accomplishment
 expense = effort
 matching results in profit = net
accomplishment
A point of recognition must be determined
 critical event
 accrual throughout earnings process

9. BEHAVIOURAL VIEW OF REVENUE
General business operation Bedford (1965)
1. Acquisition of money resources
2. Acquisition of services
3. Use of services
4. Recombination of acquire services
5. Disposition of services
6. Distribution of money resources

10. BEHAVIOURAL VIEW OF REVENUE
The critical event and recognition of net profit,
Myers (1959):
Certain critical events and decisions made by the
managers of the firm
Profit is earned at the moment of making the
most critical decision or of performing the most
difficult task in the cycle of a complete
transaction.
Depending on the nature of the business

11. BEHAVIOURAL VIEW OF REVENUE
Historical perspective
Profit (and revenue) determined on the basis of
the increase in the net worth of the firm
Through a policy of replacement accounting or
by the way of periodic asset appraisal (Chatfield,
1962)
A review of accounting, legal and economic
writing suggest that the realisation postulate was
not accepted prior to WW I – agreement on the
‘increase of net worth’ in 1913 (May, 1950)

12. REVENUE RECOGNITION
Great depression in 1930 – abuses of appraisal
valuation in 1920s
The first authoritative use of the word
‘realization’ in 1932 (Chatfield, 1962)
Supplanted by the notion that profit and
revenue had to be realised
Developed into the revenue recognition
principle (or realisation principle)
A distinction between capital and profit
emerged from court rulings

13. CRITERIA FOR REVENUE
RECOGNITION
At what point during the earning
process can revenue be recorded
as earned because there is
sufficient evidence?

14. CRITERIA FOR REVENUE
RECOGNITION

15. CRITERIA FOR REVENUE
RECOGNITION
Recognition criteria are based on the
desire for both relevant and reliable
accounting information:
1. measurability of asset value
2. existence of a transaction
3. substantial completion of the
earning process

16. REVENUE MEASUREMENT
Framework – provides 2 criteria for revenue
recognition
– it is probable that any future economic benefit
associated with the item will flow to or from
the entity
– the item has a cost or value that can be
measured with reliability
Revenue recognition is not straightforward
because of the wide range of different business
revenue-generating activities and circumstances

17. REVENUE MEASUREMENT
• The need for reliable or verifiable
measurement – conservative approaches to
valuing assets.
• Asset valuation to be recorded when
actually realised.
IAS 18/AASB 118 Revenue
revenue is to be measured at the fair value
of the consideration received or receivable

18. REVENUE MEASUREMENT
Liquidity
FASB (1984) – revenues and gains generally not
recognised until realisable (supported by AARF –
Australian Accounting Research Foundation in
Theory Monograph, 1982).
Realised – the assets received is cash or claims
to cash and realisable, the assets received is
readily convertible to known amount of cash or
claim to cash (Coombes and Martin, 1982)

19. REVENUE MEASUREMENT
Realise and Recognise???
Completely different
Realise has been defined as ‘…to convert
(securities, paper money etc.) into cash, or
(property of any kind) into money … to
obtain or amass (a sum of money, fortune
etc.) by sale, trade or similar means… On the
other hand ‘recognise’ means ‘to treat as
valid, as having existence…’
(Coombes and Martin, 1982)

20. REVENUE MEASUREMENT
Realisation
‘realisation’ should be defined strictly in the
terms of a cash receipt or a legal claim to cash
and should not refer to the broader problem of
revenue recognition (Coombes and Martin,
1982)
FASB – revenue should be realised or realisable
before recognised (1974)
Recognition requires an inflow of assets or a
measurable (quantifiable) change in the value of
an asset, whereas realisation requires an inflow
of liquid assets

21. REVENUE MEASUREMENT
FASB – revenue should be realised or realisable
before recognised (1974)
Recognition requires an inflow of assets or a
measurable (quantifiable) change in the value of
an asset, whereas realisation requires an inflow
of liquid assets
Collectability
Measurability – whether collectability of the cash
is reasonable assured
Collectability is a matter of judgement – previous
experience

22. REVENUE MEASUREMENT
Existence of a transaction
Willingness to pay from an external party in an
arm’s length transaction over the firm’s
product – objective evidence of an increase in
value in the firm.

23. REVENUE MEASUREMENT
Substantial completion of the earning process
Revenue is not generated (earned) until the firm
has performed most of the activities – to earn
revenue.
Revenue is not regarded as having been earned
until the firm has done something.

24. SALE OF GOODS
The sales point is generally the most
appropriate point to measure and record
revenue as all three criteria are met
The sales point is when the product is
delivered or the services are rendered, or
when title passes to the customer

25. EXCEPTIONS TO SALES BASIS
Exceptions to using the sale point are
1. revenue recognised during production
e.g. construction contracts
2. revenue recognised at the end of
production
production is the critical event and the sale
is assured
3. revenue recognised when cash is received
after the sale is made
instalment method and the cost recover
method

26. RENDERING OF SERVICES
Service revenue is to be recognised by
reference to the stage of completion
It is recognised in the period in which the
service is rendered
Agreements (IAS 18/AASB 118):
1. Each party’s enforceable rights regarding
the service to provided and received by the
parties
2. The consideration to be exchanged; and
3. The manner and terms of settlement.

27. INTEREST, ROYALTIES AND
DIVIDENDS
Can be recognised when received
Satisfying the general recognition criteria:
measurability, transaction and substantial
completion.
For some items, the passing of time signifies
revenue has been earned
e.g. interest revenue – accrued until end of
accounting period; royalties – accrued based
on the relevant agreement; dividend – until the
shareholder has the right to receive payment

28. IASB/FASB joint project – not well served by
the current literature
Void in revenue recognition and measurement
guidance and a lack of a conceptual basis for
resolving issues
Revenue transactions have become more
complex
eg. The ‘bundling’ of a principal products
with ancillary products and on going
services.
DEVELOPMENTS IN REVENUE
RECOGNITION AND MEASUREMENT

29. They propose:
1. recognising revenues when they arise
2. measuring them at fair value at that
point
3. measuring them when they arise from an
increase in assets or a decrease in
liabilities, at the fair value of that change
DEVELOPMENTS IN REVENUE
RECOGNITION AND MEASUREMENT

30. Resulting changes in emphasis
1. revenue is recognised when it arises
changes emphasis from realisation to
timeliness
2. revenue can result from the changes in asset
and liability values and from holding assets,
that is, from remeasurements
3. revenue recognition and measurement reflect
fair value
4. measurement should be reliable
DEVELOPMENTS IN REVENUE
RECOGNITION AND MEASUREMENT

31. DEVELOPMENTS IN REVENUE
RECOGNITION AND MEASUREMENT
Tentative agreement that two criteria must be
met to recognise revenue
1. a change in assets or liabilities must have
occurred – the elements criterion
2. the change in assets or liabilities can be
appropriately (reliably) measured - the
measurement criterion and no probability
criterion
There is less emphasis on ‘substantial
completion of the earnings process’ and on
notions of ‘realisation’ and ‘earned’.

32. FAIR VALUE MEASUREMENT
Under a mixed measurement attribute model,
all items are measured at fair value at
acquisition and thereafter are carried at
historical cost or written down historical cost
although some items are subsequently
remeasured to fair value
Gains and losses are recognised when they
occur even if they are unrealised

33. FINANCIAL STATEMENT
PRESENTATION
IASB/FASB joint project
Tentative conclusions are
1. an all-inclusive, single income statement
where all changes to assets and liabilities will
be disclosed
2. realisation is not the basis for inclusion of
items
3. separate disclosure of performance (income
flows) and remeasurement (valuation
adjustments)

34. ISSUES FOR AUDITORS
Primary issue is the overstatement of
revenues by managers:
1. intention is to deceive users
2. bonuses
3. managing earnings
4. over-optimism
5. fraud

35. SOURCE:
GODFREY, HODGSON, HOLMES, AND TARCA (2012)
ACCOUNTING THEORY 7TH EDITION
IAI (2015) STANDAR AKUNTANSI KEUANGAN
PER EFEKTIV 1 JANUARI 2015