IFRS

Introduction to IAS 18 Revenue

Overview

Revenue is the name given to an entity’s income that arises in the ordinary course of activities and is known by a number of other names including:

  1. Sales
  2. Fees
  3. Interest
  4. Dividends
  5. Royalties
  6. Rent

Revenue is disclosed in the statement of comprehensive income as a separate line item.

Revenue is Not Income

Keep in mind that “income” is more expansive than revenue and refers to both “revenue” and “gains”.

Gains on the sale of non-current assets are not included as revenue.

Statement of Comprehensive Income

The statement of comprehensive income is one of the key components of financial statements and allows users to assess the financial performance of the entity over the reporting period.

Users may use this information to assess the risk of their investments, whether or not the entity can service its debts, and other information as required.

Revenue is recognised in the income statement when:

  • there is an increase in future economic benefits related to an increase in an asset or a decrease in a liability, and
  • this increase in economic benefits can be reliably measured.

IAS 18

Under IAS 18, revenue is defined as:

‘the gross inflow of economic benefits during the period in the course of the ordinary activities of an entity, when those inflows result in increases in equity, other than increases relating to contributions from equity participants.’

Revenue relates to the economic benefits receivable by the entity for itself.

If funds are collected on behalf of a third party, such a VAT, or goods sold as an agent should be excluded from revenue as the economic benefits from these will not flow to the owners of the entity.

Concepts of Revenue

The concept of revenue is also dealt with in some way by these standards:

  • IAS 11 – Construction Contracts
  • IAS 20 – Accounting for Government Grants and Disclosure of Government Assistance
  • IAS 41 – Agriculture

But for now we’ll focus on IAS 18 – Revenue which prescribes the accounting treatment of revenue arising from various types of transactions and events.

IAS 18 also requires certain disclosures to be made in respect of revenue.

Not Applicable to IAS 18

The following is not dealt with by IAS 18 – Revenue:

  • Revenue from contracts directly related to construction contracts (IAS 11 – Construction Contracts)
  • Lease agreements (IAS 17 – Leases)
  • Dividends from investments accounted for under the equity method (IAS 28 – Investments in Associates and Joint Ventures)
  • Changes in the fair value of financial assets and financial liabilities on their disposal (IAS 39 Financial Instruments: Recognition and Disclosure)
  • Changes in the value of other current assets

What is Revenue?

Revenue is:

the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity when those inflows result in increases in equity, other than increases relating to contributions from equity participants (shareholders).

Note that IAS 18 – Revenue does not apply to revenues arising from, amongst other things:

  • Construction contracts
  • Lease agreements
  • Dividends from entities accounted for under the equity methods in accordance with IAS 28 – Investments in Associates and Joint Ventures
  • Changes in the value of other current assets

Third parties

Under IAS 18, revenue does not include amounts collected on behalf of third parties as they are not economic benefits which will flow to the entity and do no result in an increase in equity.

Let’s look at a couple of examples:

1. VAT

Revenue should be accounted for net VAT.

Make sure you record a VAT liability it there is any payable.

Also general payables and receivables should be stated VAT inclusive, as they reflect the amount of money the entity will pay or receive.

2. Agency sales

The amounts collected on behalf of the principal are not revenue.

Revenue should be recognised as the commission receivable.

Take for example a ticket seller, if they sell tickets on behalf of a venue, they may get a % commission.

The commission will be revenue, not the amount of the ticket itself.

Disclosures

Under IAS 18 – Revenue, the following disclosures are required:

  • the accounting policies adopted for recognising revenue, and
  • each significant category of revenue in the period, including the following categories:
    • the sale of goods
    • the rendering of services
    •  interest
    •  royalties
    •  dividends.
  • the amount of revenue arising from exchanges of goods or services included in each significant category of revenue.

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