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4/22/2015

IAS18RevenueRecognition

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http://www.caclubindia.com/articles/ias18revenuerecognition2566.asp

Kram
postedon06July2009

NOTIFICATIONS

IAS18REVENUERECOGNITION

Thearticlemakesanefforttounderstand
basic concepts of Revenue recognition
as stated by IAS 18 in a question and
answermode.

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IAS18RevenueRecognition

WhatisRevenue?
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.
Note that IAS refers to inflow of economic benefits which is wider than cash,
receivablesorotherconsiderationusedbyAS9.

Revenueincludesonlythegrossinflowsofeconomicbenefitsreceivedandreceivable
bytheentityonitsownaccount.Amountscollectedonbehalfofthirdpartiessuchas
sales taxes, goods and services taxes / value added taxes and amounts collected on
behalfofprincipalarenoteconomicbenefitswhichflowtotheentityanddonotresult
inincreasesinequity.

Howtomeasurerevenue?
Revenue shall be measured at the fair value of the consideration received or
receivable.
Note that IAS refers to fair value which is a wider concept and primary concept
referredtoineveryIFRS.

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IAS18RevenueRecognition

WhatisFairvalue?
Fairvalueistheamountforwhichanassetcouldbeexchanged,oraliabilitysettled,
betweenknowledgeable,willingpartiesinanarmslengthtransaction.

Whatifcashflowfromrevenueisdeferred?
Iftheinflowofcashorcashequivalentsisdeferred,thefairvalueoftheconsideration
maybelessthanthenominalamountofcashreceivedorreceivable.Forexample,an
entitymayprovideinterestfreecredittothebuyeroracceptanotereceivablebearing
a belowmarket interest rate from the buyer as consideration for the sale of goods.
Whenthearrangementeffectivelyconstitutesafinancingtransaction,thefairvalueof
the consideration is determined by discounting all future receipts using an imputed
rateofinterest.

Whatifrevenueishavingmorethanonecomponent?
Recognitioncriteriaareappliedtotheseparatelyidentifiablecomponentsofasingle
transaction in order to reflect the substance of the transaction. Example, when the
selling price of a product includes an identifiable amount for subsequent servicing,
that amount is deferred and recognised as revenue over the period during which the
serviceisperformed.Conversely,therecognitioncriteriaareappliedtotwoormore
transactions together. For example, an entity may sell goods and, at the same time,
enterintoaseparateagreementtorepurchasethegoodsatalaterdate,thusnegating
thesubstantiveeffectofthetransactioninsuchacase,thetwotransactionsaredealt
withtogether.

Whenisrevenuefromthesaleofgoodsrecognized?
Allbelowconditionshavebeensatisfied:
Entity has transferred to the buyer the significant risks and rewards of
ownershipofthegoods
Entity retains neither continuing managerial involvement to the degree
usuallyassociatedwithownershipnoreffectivecontroloverthegoodssold
Amountofrevenuecanbemeasuredreliably
Itisprobablethattheeconomicbenefitsassociatedwiththetransactionwill
flowtotheentityand
Costs incurred or to be incurred in respect of the transaction can be
measuredreliably.
NotethatdefinitionismorespecificandwiderthanthatgiveninAS9.

Whendoesentityretainsignificantrisksandrewardsofownership?
Entityretainsanobligationforunsatisfactoryperformancenotcoveredby
normalwarrantyprovisions
Receiptoftherevenuefromaparticularsaleiscontingentonthederivation
ofrevenuebythebuyerfromitssaleofthegoods
Goodsareshippedsubjecttoinstallationandtheinstallationisasignificant
partofthecontractwhichhasnotyetbeencompletedbytheentityand
Buyer has the right to rescind the purchase for a reason specified in the
salescontractandtheentityisuncertainabouttheprobabilityofreturn.

Whenisrevenuefromrenderingofservicesrecognized?
Amountofrevenuecanbemeasuredreliably
Itisprobablethattheeconomicbenefitsassociatedwiththetransactionwill
flowtotheentity
Stageofcompletionofthetransactionattheendofthereportingperiodcan
bemeasuredreliablyand
Costsincurredforthetransactionandthecoststocompletethetransaction
canbemeasuredreliably.
Revenueassociatedwiththetransactionshallberecognisedbyreferencetothestage
ofcompletionofthetransactionattheendofthereportingperiod.

Ifuncertaintyarisesaboutthecollectibilityofanamount?
Ifanamountisalreadyincludedinrevenue,theuncollectibleamount,ortheamount
inrespectofwhichrecoveryhasceasedtobeprobable,isrecognisedasanexpense.

Whencanreliableestimatesbemade?
Ifthepartiestothetransactionagreeto:
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IAS18RevenueRecognition

Eachpartysenforceablerightsregardingtheservicetobeprovidedand
receivedbytheparties
Considerationtobeexchangedand
Mannerandtermsofsettlement.

Whatisrevenuefrominterest,royaltiesanddividends?
Revenuearisingfromtheusebyothersofentityassetsyieldinginterest,royaltiesand
dividendsshallberecognisedwhen:
Itisprobablethattheeconomicbenefitsassociatedwiththetransactionwill
flowtotheentityand
Amountoftherevenuecanbemeasuredreliably.
Basisforrecognitionofrevenueis:
Interestshallberecognisedusingtheeffectiveinterestmethod
Royaltiesshallberecognisedonanaccrualbasisinaccordancewiththe
substanceoftherelevantagreementand
Dividends shall be recognised when the shareholders right to receive
paymentisestablished.
In an interestbearing investment only the postacquisition portion is recognised as
revenue.

Whathavetobedisclosed?
Anentityshalldisclose:
Accountingpoliciesadoptedfortherecognitionofrevenue,includingthe
methodsadoptedtodeterminethestageofcompletionoftransactionsinvolving
therenderingofservices
Amount of each significant category of revenue recognised during the
period,includingrevenuearisingfrom:
oSaleofgoods
oRenderingofservices
oInterest
oRoyalties
oDividendsand
Revenue arising from exchanges of goods or services included in each
significantcategoryofrevenue.

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