IAS 18 - REVENUE

IAS 18- REVENUE

OBJECTIVE

The objective of this Standard is to prescribe the accounting treatment of revenue arising from certain types of transactions and events.

     

·        Income is defined in the Framework for the Preparation and Presentation of Financial Statements as 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.   ·     Income encompasses both revenue and gains. ·     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.

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; and

(c) the use by others of entity assets yielding: ·        interest, ·        royalties and ·        dividends.

GENERAL MEASUREMENT OF REVENUE

Revenue shall be measured at the fair value of the consideration received or receivable.

When a transaction takes place, the amount of revenue is usually decided by the agreement of the buyer and seller. The revenue is actually measured, however, as the fair value of the consideration received, which will take account of any trade discounts and volume rebates.

Gross sales price                             X Less Trade discount allowed         (x)         Volume rebate                        (x)         Revenue                                 xx

·        Volume discount: financial incentives given to customers (individuals or businesses) that purchase goods in multiple units or large quantities of goods. ·      Volume Rebate: return of a portion of a purchase price by a seller to a buyer, usually on purchase of a specified quantity of goods within a specified period. Unlike discount which is deducted in advance of payment, rebate is given after the payment of full invoice amount. ·        Cash discount: An incentive that a seller offers to a buyer in return for paying a bill owed before the scheduled due date. Cash discount term may be 2/10, net 30 (i.e. 2% 10 days net 30) means customers would be allowed 2% cash discount for payment within the first 10 days on an invoice due in 30 days.

EXCHANGE TRANSACTIONS of SIMILAR NATURE and VALUE

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.  This is often the case with commodities like oil or milk where suppliers exchange or swap inventories in various locations to fulfill demand on a timely basis in a particular location.

EXCHANGE TRANSACTIONS of DISSIMILAR NATURE

When goods are sold or services are rendered in exchange for dissimilar goods or services, the exchange is regarded as a transaction which generates revenue.  The revenue is measured at the fair value of the goods or services received, adjusted by the amount of any cash or cash equivalents transferred.  When the fair value of the goods or services received cannot be measured reliably, the revenue is measured at the fair value of the goods or services given up, adjusted by the amount of any cash or cash equivalents transferred.

SALE OF GOODS

Goods includes: ·        goods produced by the entity for the purpose of sale and ·        goods purchased for resale, such as merchandise purchased by a retailer or land and other property held for resale.

RECOGNITION CRITERIA FOR REVENUE FROM SALE OF GOODS

Revenue from the sale of goods should only be recognised when all these conditions are satisfied.
a.       Risk and Rewards	The entity has transferred the significant risks and rewards of ownership of the goods to the buyer
b.       Managerial involvement	The entity has no continuing managerial involvement to the degree usually associated with ownership, and no longer has effective control over the goods sold
c.       Probability of economic benefits	It is probable that the economic benefits associated with the transaction will flow to the entity
d.       (Revenue) Reliability of measurement	The amount of revenue can be measured reliably
e.       (Cost) Reliability of measurement	The costs incurred in respect of the transaction can be measured reliably

RENDERING OF SERVICES

Rendering of services, IAS 18 0R IAS 11

·        The rendering of services typically involves the performance by the entity of a contractually agreed task over an agreed period of time.  ·        The services may be rendered within a single period or over more than one period.  ·        Some contracts for the rendering of services are directly related to construction contracts, for example, those for the services of project managers and architects.  Revenue arising from these contracts is not dealt with in this Standard but is dealt with in accordance with the requirements for construction contracts as specified in IAS 11 Construction Contracts. Therefore: Rendering of service (not directly related to construction contract) – IAS 18 2. Rendering of service (directly related to construction contract) – IAS 11

Revenue recognition of services takes place as follows (similar to IAS 11, Construction Contracts):

■ When the outcome (amount of revenue, stage of completion, and costs) of the transaction can be estimated reliably, revenues are recognized according to the stage of completion at the reporting date.

■ When the outcome of the transaction cannot be estimated reliably, recoverable contract costs will determine the extent of revenue recognition.

The outcome of a transaction can be estimated reliably when all these conditions are satisfied.
a.       Stage of completion	The stage of completion of the transaction at the end of the reporting period can be measured reliably
b.       Probability of economic benefits	It is probable that the economic benefits associated with the transaction will flow to the entity
c.       (Revenue) Reliability of measurement	The amount of revenue can be measured reliably
d.       (Cost) Reliability of measurement	The costs incurred for the transaction and the costs to complete the transaction can be measured reliably

Methods of calculating Stage of completion

a.       Revenue method: surveys of work performed;

b.       Service unit: services performed to date as a percentage of total services to be performed; or

c.       Cost method: 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

THE USE BY OTHERS OF ENTITY’S ASSET YIELDING:

a.       Interest: is the charge for the use of cash or cash equivalents or amounts due to the entity.

b.       Royalties: are charges for the use of non-current assets of the entity, eg patents, computer software and trademarks.

c.       Dividends: are distributions of profit to holders of equity investments, in proportion with their holdings, of each relevant class of capital.

The revenue is recognised on the following bases.

(a) Interest is recognised on a time proportion basis that takes into account the effective yield on the asset

(b) Royalties are recognised on an accruals basis in accordance with the substance of the relevant agreement

(c) Dividends are recognised when the shareholder's right to receive payment is established