IFRS

Revenue Recognition for under IAS 18

What is Revenue?

Revenue is the gross inflow of economic benefits (cash, receivables, other assets) arising from the ordinary operating activities of an enterprise (such as sales of goods, sales of services, interest, royalties, and dividends).

Revenue does not comprise gains on the sale of property, Property Plant and Equipment (PP&E) – unless the PP&E items were leased out under an operating lease -, or other fixed assets and net finance income.

How is Revenue Measured?

  • Measured at the fair value of the consideration received or receivable. 
(Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.)
  • If the inflow of cash or cash equivalents is deferred, the fair value of the consideration receivable is less than the nominal amount of cash and cash equivalents to be received, and discounting is appropriate. Examples of this are if the seller is providing interest-free credit to the buyer or is charging a below-market rate of interest. Interest must be imputed based on market rates.
  • An exchange for goods or services of a similar nature and value is not regarded as a transaction that generates revenue. However, an exchange for a dissimilar item is regarded as generating revenue.

Recognition

Look for the critical event – risks transferred

Sale of Goods

Revenue arising from the sale of goods should be recognised when all of the following criteria have been satisfied:

  • Significant risks and rewards of ownership are transferred.
  • Seller has no further involvement in goods (no managerial control)
  • Amount of revenue can be measured reliably.
  • Economic benefits will flow to the seller (probability)
  • Costs can be measured reliably

Rendering of Services

When the outcome of a transaction can be estimated reliably, revenue should be recognised by reference to the stage of completion of the transaction at the reporting date, provided that all of the following criteria are met:

  • Amount of revenue can be measured reliably
  • Economic benefits will flow to the seller (probability)
  • Stage of completion at the reporting date can be measured reliably.
  • The costs incurred, or to be incurred can be measured reliably.

When the outcome of a transaction cannot be estimated reliably, revenue arising from the rendering of services should be recognised only to the extent the expenses recognised are recoverable.

Interest, Royalties and Dividends

For interest, royalties and dividends, if it is probable that the economic benefits will flow to the enterprise and the amount of revenue can be measured reliably, revenue should be recognised as follows:

  • Interest: on a time proportion basis that takes into account the effective yield.
  • Royalties: on an accruals basis in accordance with the substance of the relevant agreement; and
  • Dividends: when the shareholder’s right to receive payment is established.

Disclosures

  • The accounting policy for the recognition of revenue
  • The amount of each significant category of revenue, including:
    – Sale of goods.
    – Rendering of services
    – Interest
    – Royalties
    – Dividends.
  • The amount of revenue from exchanges of goods or services in each of the categories above

What you Should Know for the ACCA F7 Syllabus

When you’re studying Revenue for the ACCA F7 Financial Reporting exam (or even the ACCA P2 Corporate Reporting exam) you should make sure you know:

  • Recognising and describing why it’s important to recognise revenue on the substance of the transaction, not just its legal form (and give examples of where the legal form of a transaction might be misleading)
  • Account for these types of transactions
    • Goods sold on sale or return / consignment inventory
    • Sale and leaseback or repurchase agreements
    • Factoring of receivables

Also, make sure you know how to recognise revenue arising on Construction Contracts.

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