1. IAS 18: Revenue
Roshankumar Pimpalkar
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2. The objective of IAS 18 is to prescribe the accounting treatment for revenue arising
from certain types of transactions and events.
Revenue is recognised when it is probable that the future economic benefits will flow
to the enterprise and those benefits can be measured reliably and when certain
specific 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 Revenues
Revenue should be measured at the fair value of consideration received or
receivable, taking into account the amount of trade discounts, volume rebates and
time value of money. Nevertheless, when an uncertainty arises about the
collectability of an amount already included in the revenue, the following are
recognised an expense:
The uncollectable amount, or
The amount in respect of which the recovery has ceased to be probable
They are treated as an expense, rather than an adjustment to the amount of revenue
which has already been recognised.
Financing Transaction
When the arrangement effectively constitutes a financing transaction the difference
between the fair value and nominal amount of consideration should be recognised as
interest revenue.
The fair value of consideration should be determined by discounting all the future
receipts, 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.
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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 transaction
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. For example when the selling price of a product includes an identifiable
amount for subsequent servicing, that amount is deferred and recognise as revenue
over the period during which service is performed.
Series of transaction
The recognition criteria must be applied to two or more transactions together when
they are linked in such a way that the commercial effect cannot be understood
without reference to the series of transaction as a whole. For example an enterprise
sales goods and at the same time, enters into a separate agreement to repurchase
them at a later date.
Sale of Goods
Revenue from the sale of goods should be recognised when all the five of the
following 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 reliably
Example 1:
A person acquires a second hand car and will pay for the car over a set period of
time. The seller retains legal title until the buyer has settled the outstanding debt. In
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4. this situation the buyer enjoys the risks and rewards of ownership even though legal
title has not yet transferred.
Example 2:
Here's a situation related to shipping conditions. Revenue should be recognised
depending on when the acquirer accepts the risks and rewards of the product
acquired. In these circumstances, shipping terms are a key indicator to identify the
transfer or risks. For example, free onboard (FOB) Shipping Point generally
means that the purchaser accepts the risks and rewards of ownership when the
goods 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 risks
and rewards of ownership when the goods have arrived at the port in the country
where the purchaser is based. It is therefore very important to understand the
implications of all terms in a contract.
Product Return
When the customer has the option to return the goods Revenue would be
recognised 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 Sales
These are sales in which delivery is delayed at the buyer’s request but the buyer
takes title and accepts billing. In these circumstances revenue is recognized when
the 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 or
manufacture the goods in time for delivery.
Customer loyalty programmes
Customer loyalty programmes are used by entities to provide customers with
incentives to buy their goods and services, whereby the entity grants the customer
award credits when buying goods or services.
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5. Customers may be required to accumulate a specified minimum number of award
credits before they are able to redeem them. The entity may operate the customer
loyalty programme itself or participate in a programme operated by a third party.
Award credits are accounted for as a separately identifiable component of the sales
transactions in which they were granted. It is important to note that IFRIC 13 only
applies to situations where award credits are granted as part of a sales transaction
and does not apply to situations where award credits are granted for free outside of a
sales 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 redeemed
When a third party supplies the awards, the entity has to assess whether it is
collecting the consideration for its own account or as an agent on behalf of the third
party.
One feature indicating that an entity is acting as an agent is that the amount the
entity earns is predetermined, being either a fixed fee per transaction or a stated
percentage of the amount billed to the customer. If it is an agent, it measures
revenue as the net amount retained for its own account when the third party
becomes 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 and
rewards associated with the sale of goods or the rendering of services. Features that
indicate 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 customer
or 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; and
d)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 consideration
allocated 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 delivery
of the award credits.
Services
Revenue associated with a transaction for the rendering of services should be
recognised by reference to the stage of completion of the transaction at the reporting
date, when the outcome can be estimated reliably. This occurs when all of the
following conditions are satisfied:
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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 reliably
The 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 from
customers often do not reflect the services performed.
The recognition of revenue from the initiation fees depends on the nature of the
services provided. The appendix to IAS 18 states, "Revenue recognition depends on
the nature of the services provided. If the fee permits only membership, and all other
services or products are paid for separately, or if there is a separate annual
subscription, the fee is recognised as revenue when no significant uncertainty as to
its collectibility exists. If the fee entitles the member to services or publications to be
provided during the membership period or to purchase goods or services at prices
lower than those charged to non-members, it is recognised on a basis that reflects
the timing, nature and value of the benefits provided."
Installation fees are recognised as revenue by reference to the stage of
completion of the installation, unless they are incidental to the sale of a product, in
which case they are recognised when the goods are sold.
Interest, royalties and dividends
Revenue arising from the use by others of enterprise assets yielding interest,
royalties and dividends should be recognised when:
it's probable that the economic benefits associated with the transaction will
flow to the enterprise
and
the amount of the revenue can be measured reliably
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7. Interest shall be recognised using the effective interest method as set out in IAS 39
Financial Instruments: Recognition and Measurement.
Royalties shall be recognised on an accrual basis, in accordance with the substance
of the relevant agreement. That is:
- any royalties that are certain to be paid are recorded as revenue as soon as the
seller has performed, by transferring the associated rights to the buyer;
- any incremental royalties are recognised as revenue as the buyer becomes obliged
to pay.
Dividends shall be recognised when the shareholder's right to receive payment is
established.
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