CAEA1214: FINANCIAL

ACCOUNTING AND REPORTING II

REVENUE

S Chap. 5;
S & S Chap. 7 & 8; MFRS118 & MFRS101

Outline
Measurement issue
Recognition issue
Sale of goods
Rendering of services
References:
S Chapter 5; S & S Chapter 7 & 8
MFRS118 & MFRS101

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Learning Objectives
After this lecture, students are able to understand the
requirements of MFRS118, specifically:
What is revenue?
Issues relating to revenue:
1. When to recognize revenue.
2. How to measure revenue.

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Why revenue is important?

To determine the amount of income earned by an
entity in a particular accounting period.
Income = Revenue + Gain (Expenses + Losses)
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.
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What is Revenue?
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.
MFRS118, P7:
Revenue is the gross inflow of economic benefits
during the period arising in the course of the ordinary
activities of an enterprise when those inflows result in
increases in equity, other than increases relating to
contributions from equity participation.
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What is Revenue?

Increases in equity can be in the form of:

inflows or enhancements of assets, or
decreases of liabilities
Ordinary activities including sale of goods (sales
revenues), provision of services (fees), uses of
funds/other resources (interest; dividends; royalties).

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What is Revenue?

Some inflows of economic benefits do not result in

the increases in equity for the company some eg.
(P8):
amounts collected on behalf of third parties such as
sales taxes, goods and services taxes and value
added taxes, or
amounts collected on behalf of the principal in an
agency relationship; revenue for an agent is the
amount of commission earned from a particular
service provided to the principal.
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Conceptual Framework

LIABILITIES

Contributions
by owners

ASSETS
Share capital
+
Retained
EQUITY
Earnings
Assets - Liabilities = Equity or net assets
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Conceptual Framework
Framework

REVENUE

EXPENSES

INCOME
Revenue - expenses = operating income
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How do you distinguish the followings:

Assets
Liabilities
Equity
Investments by owners
Distributions to owners
Income
Revenue
Expenses
Gains
Losses

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Balance sheet
Statement of
movement in equity

Income Statement

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When to recognize revenue?

The primary issue in accounting for revenue is

determining when to recognize revenue, i.e. the
timing.
Revenue is recognized when it is probable that
future economic benefits will flow to the entity
and these benefits can be measured reliably.

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Revenue arises from MFRS118, P1:

Sale of goods P3
Goods
produced
by entity

Rendering of
services P4

Goods purchased
for resale
Land & other property
held for resale
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Use of entitys
assets: interest,
royalties &
dividends P5

Performance of a
contractually agreed task
e.g. Construction contracts
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Use of Resources P5
(a) Interest charges for the use of cash or cash
equivalents or amounts due to the entity;
(b) Royalties charges for the use of long-term
assets of the entity, for example, patents,
trademarks, copyrights and computer software; and
(c) Dividends distributions of profits to holders of
equity investments in proportion to their holdings
of a particular class of capital.

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Presentation of Revenue
Revenue is the first item that appears in the income
statement MFRS101, P82 (see also the example given
in P102).
It represents the gross inflow of cash, receivables or other
considerations arising in the ordinary activities of an
enterprise.
What is meant by ordinary activities??
Ordinary activities are any activities which are
undertaken by the company as part of the main operations
of the company.
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Measurement of Revenue
How is revenue measured?
MFRS118, P9 - 10:
Revenue should be measured at the fair value of the
consideration received or receivable minus any trade
discounts or rebates allowed.
What is fair value??

Fair value is the amount for which an asset could be

exchanged, or a liability settled, between knowledgeable,
willing parties in an arms length transaction P7.
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Measurement of Revenue

Measurement of revenue is usually straight forward.

However, in the following circumstances, substance
over form considerations are applied:
Barter trade or exchange transaction P12
In substance financing arrangements P11
Combination of sale and services example,
franchising arrangements
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Measurement of Revenue
Barter trade: if transactions consists of exchanges of
non-cash assets need to differentiate as either similar or
dissimilar assets. Only recognize as revenue in the case of
dissimilar assets;
How to determine the amount of revenue?
Measured at the fair value of the goods or services
received, adjusted by the amount of any cash or cash
equivalents transferred or the fair value of the goods or
services given up, adjusted by the amount of any cash or
cash equivalents transferred.
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Measurement of Revenue

Important point to note:

Revenue can only be recognized if it has been
earned or realized, not a mere transfer of assets.

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Example 1

On 2nd February 2016 Awan Bhd transferred trading

merchandize to Emas Bhd with a cost of RM1,000,000 for
an invoice amount of RM1,020,000. In return Awan Bhd
received from Emas Bhd trading merchandize at a cost of
RM1,010,000 and can be sold at a retail price of about
RM1,030,000. Apart from the exchange of merchandize,
Awan Bhd. paid cash of RM100,000 to Emas Bhd.

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Example 1

Question: Can the transaction be recognized as revenue

by Awan Bhd?
The transaction should be treated as a mere transfer of
merchandize and not as a realized sale transaction.
Why?
Because it involves a swap of inventories in various
locations to fulfill demand on a timely basis in a particular
location, both of which are for the purpose of Awans
trading operations P12.
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Example 1: Solution
In the book of Awan Bhd.
Journal entries:
RM000
1,010

Dr. Inventories account

RM000

(for the good received from Emas Bhd)

Cr. Inventories (old) account

1,000

(for the good transferred to Emas Bhd)

Cr. Cash account

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100

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Example 2
Refer to example 1, assume that the transaction
represents a sale of goods to Emas Bhd. Emas Bhd pays
for the goods by transferring a machine to Awan Bhd.
The fair value of the machine is RM 1,010,000.

Question: How should this transaction be recognized by

Awan Bhd?

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Example 2: Solution

In this case, this is an exchange of dissimilar assets &

therefore, Awan Bhd should recognize the transaction as
a sales revenue. The amount of revenue should be
measured at RM 1,010,000, which is the fair value of the
machine received P12.

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Example 2: Solution
In the book of Awan Bhd.
Journal entries:
Dr. Machinery account (under PPE)
Cr. Sales revenue
Dr. Cost of goods sold
Cr. Inventories account

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RM000 RM000
1,010
1,010
1,000
1,000

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Example 2: Solution

What do you do when you cannot measure reliably the

fair value of the non-cash asset received?
Measure by reference to the fair value of goods
sold/services provided, or
Use selling prices for goods and services

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Example 3
Awan Bhd sold goods to Emas Bhd with a cost of
RM1,020,000 for an invoice amount of RM1,060,000.
In payment for the goods received, Emas Bhd
transferred non-cash asset to Awan Bhd worth about the
invoice amount, the fair value of which cannot be
determined reliably. The normal selling price of Awans
goods is 50% markup on cost.

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Example 3
Question: How will Awan Bhd measure this revenue?
Amount of sales should be based on the normal selling
price less trade discounts given.
So based on the normal selling price, amount of revenue
would have been RM1,080,000 (i.e. 150% x
RM1,020,000).
The difference between this amount and the actual invoice
value should be deemed as trade discounts allowed to the
buyer.
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Example 3

In the book of Aman Bhd.

Journal Entries:
RM000
160

Dr. Sundry assets

Cr. Sales revenue

160

Dr. Cost of good sold

Cr. Inventories account

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RM000

120
120

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In Substance Financing P11

For example, a company gives credit under hire purchase
or installment plan, hence, necessary to split up the total
consideration receivable into:
Revenue from sale of goods; and
Interest revenue for the financing provided.

How??

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In Substance Financing P11

1. Value of revenue from the sale of goods may be measured
by discounting all future receipts using an implicit rate of
interest in the arrangement; or
2. The equivalent cash sale price is used if it is clearly more
evident.
The imputed rate of interest is the more clearly
determinable of either:
(a) the prevailing rate for a similar instrument of an issuer
with a similar credit rating; or
(b) a rate of interest that discounts the nominal amount of
the instrument to the current cash sales price of the
goods or services.
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In Substance Financing P11

This revenue should be recognized based on the
normal requirement for sale of goods.
The interest revenue is measured as the difference
between the total consideration receivable and the fair
value of the sales revenue; the interest revenue should
be spread over the financing period.

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Example 4
Baba Bhd sold a machine with a cost of RM1,000,000
to Nyonya Bhd on 12 February 2016. The terms of the
sale include a five annual installments of RM300,000
each payable at the end of each year. The cash selling
price of the machine is RM1,020,000.
Question: How will you record the revenue in the
accounts of Baba Bhd ?

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Example 4: Solution
The total consideration receivable is RM1500,000 (i.e.
RM 300,000 x 5 years). The cash selling price of the
machine is RM1,020,000 and may be used to measure the
revenue from the sale of goods.
Therefore, the difference of RM480,000 should be treated
as interest revenue and be recognized over the five years
period using an appropriate basis such as sum of digit
method or straight line method.

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Example 4: Solution
In the book of Bayu Bhd
Journal Entries:
Dr. Debtors account
Cr. Sales revenue
Cr. Deferred interest revenue

RM000
1,500

Dr. COGS
1,000
Cr. Machinery Inventories account

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RM000

1,020
480

1,000

34

Example 4: Solution
At the end of each year, over the five years period, an
appropriate amount is recognized as interest revenue as
follows:

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Example 4: Solution
The total interest revenue is allocated over a 5 year period
based on sum of digits method.
Sum of digits = 1+2+3+4+5= 15
allocation of interest:
SOD
SL
2014
5/15 x 480,000
= 160,000
96,000
2015
4/15 x 480,000
= 128,000
96,000
2016
3/15 x 480,000
= 96,000
96,000
2017
2/15 x 480,000
= 64,000
96,000
2018
1/15 x 480,000
= 32,000
96,000
480,000
480,000

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Example 4: Solution
Journal Entries:
2016
Dr. Cash
Cr. Debtor account
Dr. Deferred revenue
Cr. Interest revenue

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RM000
Sum of digits
300
300
160

96

160

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RM000
Straight line
300
300

96

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Combination of sales of goods and

rendering of services P13
For example:
Sales of computer software plus free after sale services
and technical support;
Franchise arrangements which cover initial supply of
equipment and continuing services;
Sale of goods which provide after sale services for
specified periods.

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Combination of sales of goods and

rendering of services P13
Then, you have to split the transactions into two:
Sale of goods
Services to be rendered.

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Example 5
Mapple Bhd entered into a franchise arrangement with
BBM Bhd for the latter to use and market its patented
computer software, Doors.
The arrangement calls for payment of RM100 million up
front to cover initial supply of software and technical
support and services because Doors is unique to BBM
Bhd itself and there is no market equivalent service price
of this nature.

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Example 5

However, the estimated cost to provide the technical

support and services, based on the company similar
franchise arrangements in the past, is about RM20 million
and it is considered that a 50% mark-up on cost is a
reasonable profit for services.
Question: How would you record the franchise revenue?

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Example 5: Solution
The fair value of the service revenue should be measured
first.
In this case, it can be measured with reference to the given
cost plus a reasonable profit:
RM20 million x 150% = RM30 million.
This service revenue of RM30 million may be recognized
progressively over the five years period by reference to
the stage of completion of the services provided. The
difference of RM70 million represents revenue from the
sales of the software.
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Measurement of Revenue
The measurement issue also affects the timing of revenue
recognition.

How?
Revenue must be reliably measured before it can be
recognized.
When there are uncertainties relating to the measurability of
the amount of revenue arising from a transaction, revenue
recognition should be postponed until the uncertainties are
resolved.
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Recognition of Revenue
Sale of Goods P14:
Provided that the amount is measurable and it is not
unreasonable to expect ultimate collection, then revenue
is recognized when following conditions are satisfied:
The enterprise has transferred to the buyer the
significant risks and rewards of ownership of the
goods, see also P15.
All significant acts have been completed see also P16 .

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Recognition of Revenue
The enterprise retains no continuing managerial
involvement in or effective control of the goods
transferred to a degree usually associated with ownership,
see also P17; and
No significant uncertainty exists regarding:
consideration
costs
Returns, see also P17, 18 and 19.

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Recognition of Revenue
Service Revenue:
Essential feature: Performance P20
Revenue is recognized as the service is performed
(stage of completion method) provided that no
uncertainty exists regarding:
1. Consideration
2. Costs
3. Stage of completion.

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Recognition of Revenue
The stage of completion/percentage of completion
method revenue is recognized in the accounting
periods in which the services are rendered.
The recognition of revenue on this basis provides
useful information on the extent of service activity
and performance during a period.

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Recognition of Revenue
The stage of completion may be determined by a variety
of methods include:
(a) surveys of work performed;
(b) services performed to date as a percentage of total
services to be performed; or
(c) 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.
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Recognition of Revenue
Interest revenue:
Interest should be recognized on a time proportion basis
taking into account the principal outstanding and the
rate applicable MFRS118, P30 (a).

However,

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Recognition of Revenue
For Financial institutions in Malaysia, the recognition of
interest revenue on loans & advances must also be in
accordance with BNM guidelines (BNM/GP3 and GP8)
relating to suspension of interest on non-performing
loans.
Covered under specialized accounting course

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Example 6
May Bank Berhad grants a loan of RM1 million on 1
April 2015 at an interest rate of 12 % per annum to a
client.
Question: What is the amount of interest to be recognized
as revenue by May Bank for year ended 31 December
2015?
May Bank Berhad should recognize an interest
income of RM90,000 ( i.e. RM 1,000,000 x 9/12 x
12%)
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Recognition of Revenue
Royalties:
Royalties should be recognized on an accrual
basis in accordance with the term of the relevant
agreement MFRS118, P30(b).

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Example 7
Kuari Bhd owns a granite quarry. Bitumen Bhd
operates the quarry. The royalty agreement between
Kuari Bhd and Bitumen Bhd stipulates that Kuari
Bhd should be paid RM100 for every square meter
of granite extracted by Bitumen Bhd.

Question: When will Kuari Bhd recognize the

royalty revenue?
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Example 7
As and when Bitumen Bhd extracts the granite,
usually there will be some form of statement
which Bitumen Bhd should submit to Kuari Bhd
and Kuari Bhd will recognize accordingly as the
statement been received.

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Recognition of Revenue
Dividend revenue:
Dividends should be recognized when the
shareholders right to receive payment is
established MFRS118, P30 (c).

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Example 8
Angkasa Bhd is an investment company. It has
investments in shares of listed companies on
Bursa Malaysia. Its year end is 30 June. It had the
following shares:
Counter No of Shares Dividend/
Date
Share
Declared
A
100,000
0.02
31.03.15
B
200,000
0.05
30.04.15
C
300,000
0.10
30.09.15
D
100,000
0.10
01.01.16
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Example 8
Question: What is the dividend revenue recognized
for the year ended 30 June 2016?
Counter

No of Shares

A
B
C
D

100,000
200,000
300,000
100,000

Dividend/
Share
0.02
0.05
0.10
0.10

Date
Declared
31.03.15
30.04.15
30.09.15
01.01.16

Financial year end: 01/07/15 - 30/06/16

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Example 8
Dividend revenue recognized for the year ended 30 June
2016:
C shares (300,000 x 0.10)
= RM 30,000
D shares (100,000 x 0.10)
= RM 10,000
Gross dividends
RM 40,000

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MFRS118 provides circumstances of

uncertainties relating to the measurement
of revenue:

Consideration

Returns

Costs
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Guide to test for revenue

recognition

Is ultimate collection reasonably No

expected?

Defer
recognition

Yes

Is consideration reasonably
determinable?

No

Defer
recognition

Yes

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Guide to test for revenue

recognition
Yes
Are costs (including warranties) to be
incurred reasonably determinable?

No

Defer
recognition

Yes
Are returns significant and
unpredictable?
Yes

No

Defer
recognition

Recognize revenue
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Disclosure Requirements
P35:
Accounting policies adopted, including the methods
adopted to determine the stage of completion of
transactions involving the rendering of services;
The amount of each significant category of revenue
recognized;
The amount of revenue arising from exchange of goods
or services;
Any contingent liabilities or assets (P36).
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