20090827120835BBFA2203 Topic 1

Topic  Revenue
Recogntion
1 (MASB 9)
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Define revenue;
2. Calculate revenue;
3. Recognise revenue from sales of goods and from rendering of
services; and
4. Discuss the accounting policies for the recognition of revenue.
 INTRODUCTION
Why do people run businesses? Your answer somehow might lead us to
conclude that everyone needs a better life, luxurious life, prosperous life or in
simpler word more money in our bank accounts.
Revenue is the income sources of an organisation. The revenue measurement and

timing of revenue recognition are important in determining the performance of
the enterprise.
Hence, in this topic, we will discuss the general principles for revenue
measurement and recognition. These are the two main issues in accounting for
revenue. We have to resolve the issue of revenue recognition before deducting
the expenditure from the revenue to get the income. Thus, revenue recognition is
important to the issue of income determination.
2  TOPIC 1 REVENUE RECOGNITION (MASB 9)
1.1 REVENUE
SELF-CHECK 1.1
Can you differentiate among sale, income, turnover and revenue?
You need to remember that sales, revenue and income have special meaning in
accounting. The term sales means the goods sold in the course of the ordinary
activities of an enterprise and which were bought with the prime intention of
resale. Therefore, we must not use the word ÂsalesÊ in the disposal of other items,
such as machineries or motor vehicles that were purchased to be used and not to
be sold.
Do you know what revenue is?
Generally, the term revenue means the sales value of goods and services that
have been supplied to customers. As we compare sales and revenue, we will
know that sales is subset or part of revenue.
MASB 9 defines revenues as:
„The gross inflow of economic benefits during the period arising in the course
of the ordinary activities of an enterprise when those inflow result increase in
equity, other than increases relating to contributions from equity
participants‰.
If you look at the definition, enterprise in different industry will have different
element in their revenue. This is due to the difference in their nature of ordinary
activities. We are referring ordinary activities as principle activities.
For example, a hotelÊs revenue may come from renting rooms and providing
food and beverages for their customers
Now, let us consider a situation where a hotel receives compensation of damages

from government due to tsunami. Should we consider this inflow of economic
benefit as part of revenue?
TOPIC 1 REVENUE RECOGNITION (MASB 9)  3
The answer is no. This is because the receipt is not related to the ordinary
activities of the hotel. Therefore, this should be excluded from the companyÊs
revenue. Revenue is income that takes place in the ordinary course of business
activity.
From the definition, we must know that not all the events that cause increase in
equity will be classified as revenue. MASB 9 clearly states that revenue includes
only the gross inflows of economic benefit received and receivable by the
enterprise on its own account. So, these inflows of economic benefits are not
including increases relating to contribution from shareholders and amounts
collected on behalf of third parties. Examples which result equity increases are
issuing of new share and injection of additional fund by the owner. Examples of
inflows which do not result in increases in equity are sales taxes, and goods and
services taxes.
So, what is the different between revenue and income?
The Framework for the Preparation and Presentation of Financial Statements

defines income 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‰.
From the above definition, income includes both revenue and gains. Gains are
different from revenue because they do not generally arise from ordinary course
of business activity however gains will cause the increase in equity. Examples of
gains are surplus from revaluation and disposal of non-current assets.
ACTIVITY 1.1
1. In the case of a trading company, what are the ordinary activities

of this business?
2. Visit the MASB official website to learn more about Malaysian
Accounting Standard Board.
MASB. (2006). Malaysian Accounting Standard Board.
www.masb.org.my.
1.2 MEASUREMENT OF REVENUE

Before we can record a transaction, we must know the amount that we need to
record. So our concern here is how to measure the revenue. According to MASB 9
[para 10] we should measure revenue received or receivable at the fair value. By
the way, do you know what fair value is?
Fair value is the amount for which an asset could be exchanged, or a liability
settled, between knowledgeable, willing parities in an armÊs length
transaction.
So, the amount of revenue is the agreed price between the enterprise and the
buyer. It is measured at the fair value after deducting the trade discounts and
volume rebates allowed by the enterprise. Generally, the market price or value is
taken as the fair value.
Example 1
Comfort Seat Sdn. Bhd. sells 1,000 units office chair to Office Concept Sdn.
Bhd. at RM100 per unit and give 5% trade discount.
Required
How much is the revenue recognised by Comfort Seat Sdn. Bhd.?
Solution
Revenue is measured at the fair value after deducting the trade discount.
Revenue = 1,000 units  RM100  95%
= RM95,000
1.3 REVENUE RECOGNITION

ACTIVITY 1.2
Can you differentiate between cash discount and trade discount?
After determining the amount to be recorded, we now need to determine the

timing to recognise the revenue in the income statement. Before we discuss the
recognition criteria, please be reminded that operating cycle of the entity consists
of many different points. Figure 1.1 shows the typical operating cycle of a trading
company.
Figure 1.1: The operating cycle of trading company
At the end of financial year, the trading companyÊs activities will be at various
points in the operating cycle. Some activities will be at the point of placing order,
others at the stage of awaiting delivery or billing.
It is necessary to determine a point in the operating cycle at which to recognise

revenues. When an activity reaches this point, the revenue from the activity is
recognised. Therefore, it is important for us to know what are the recognition
criteriaÊs.
According to MASB, revenue is recognised when it is probable that future

economic benefit will flow to the enterprise and these benefits can be
measured reliably.
In short, we can recognise revenue when the revenue is measurable and it is

probable that the revenue will be collected in the future. If in a situation where
revenue can be measured reliably but the collection is still uncertain, then we
have to defer the recognition of revenue until we solve the uncertainty. In
practice, if we have uncertainty in revenue collection, we either restrict the
transaction to be made in cash or forgo the transaction entirely as it is very likely
that we will not be able to collect the revenue.
MASB 9 defines probable as „more likely than not to occur and a probability
of greater than 50% would be regarded as more likely than not‰. In short,
probable means more than 50%.
For example, let us look at the following situation. If at the time of sale or
rendering of the service, the enterprise estimates that there is more than a 50%
chance that the sale or service revenue will be collected. The enterprise should
recognise the revenue at the point of sale or the service rendered. However, if
they consider that the probability of the ultimate collection is less than 50%,
revenue recognition should be postponed because the pre-requisite condition of
probable inflows of economic benefits is not met.
1.3.1 Recognition of Sales of Goods

MASB 9 [para 15] prescribe that revenue from sale of goods should be recognised
when all the following conditions have been satisfied, as illustrated in Table 1.1.
Table 1.1: Conditions that Permits the Recognition of Sales of Goods
Condition Description
Risk and rewards The enterprise has transferred to the buyer the significant risks
and rewards of ownership of the goods.
Managerial The enterprise retains neither continuing managerial involvement
involvement to the degree usually associated with ownership nor effective
control over the goods sold.
Amount of revenue The amount of revenue can be measured reliably.
Economic benefits It is probable that the economic benefits associated with the
transaction will flow to the enterprise.
Costs The costs incurred or to be incurred in respect of the transaction
can be measured reliably.
Let us explore each of the conditions illustrated in Table 1.1 in more detail.
(a) Risks and Rewards of Ownership and Continuing Managerial Involvement

According to MASB, in most retail sales cases the transfer of the risks and
rewards of ownership coincides with the transfer of the legal title or the
passing of possession to the buyer.
If the enterprise retains significant risks and reward incident to ownership,

the transaction is not a sale and therefore revenue is not recognised. MASB
9 [para 17] provides examples of situations in which the enterprise may
retain the significant risks and rewards of ownership, as tabulated by

Table 1.2.
Table 1.2: Situations and Risks
Types of Risks Explanation

Obligation for When the enterprise retains an obligation for
unsatisfactory performance unsatisfactory performance not covered by normal
warranty provisions.
Derivation of revenue When the receipt of revenue from a particular sale is
contingent on the derivation of revenue by the buyer
from its sale of the goods.
Goods shipped subjected to When the goods are shipped subject to installation and
installation the installation is a significant part of the contract which
has not yet been completed by the enterprise.
BuyerÊs right to rescind When the buyer has the right to rescind the purchase for
a reason specified in the sales contract and the enterprise
is uncertain about the probability of return.
Therefore, we might want to consider the following factors when we are

assessing the circumstances of the transaction to determine whether significant
risks and rewards have been transferred to the buyer.
(i) Whether any significant acts of performance remain to be completed;
(ii) Whether the seller retains any continuing managerial involvement in, or
effective control of, the goods transferred to a degree usually associated
with ownership; and
(iii) Whether the payment of the debt relating to the goods transferred is
dependent on the derivation of revenue by the buyer from the goods.
Example 2
Revenue from sales of television set should be recognised when the goods is
delivered even though the sale is subject to installation of antennae. This is
because the installation is a simple process. Therefore, only insignificant risk
and reward of ownership is retained.
Example 3
Let us consider the case of the consignment sale, which the recipient
(consignee) undertakes to sell the goods on behalf of the shipper (consignor).
Revenue is recognised by the shipper when the goods are sold by the recipient
to third party and not at the point the goods shipped to the recipient. This is
because there is no transfer of risks and rewards of ownership of the goods at
the point where the goods are shipped to the recipient. The shipper retains
title until the goods are sold. The unsold goods is a part of the shipperÊs
inventory, even though the goods are in the hands of the recipient. The
consigned goods should be included in the recipientÊs inventory.
(b) Economic Benefit

The other criteria of revenue recognition need to be satisfied is the amount
of economic benefit arising from the transaction have a reliable
measurement and the inflow has probably occurred.
In an arm length transaction, we can refer to the documentary evidence

such as agreement or invoice to provide reliable measurement of the
economic benefit. After that, if we are reasonable to expect ultimate
collection then, we can recognise revenue from a sale of goods at the point
of sales. If either one of these criteria are not fulfilled, revenue recognition
should be postponed.
(c) Costs Incurred

The last criterion to be satisfied for the recognition of revenue from a sale of
goods is that the costs incurred or to be incurred in respect of the
transaction should be measured reliably. Why? Matching principle requires
that in an accounting period, costs are matched with related income.
Revenue and expenses that relate to the same transaction should be
recognised simultaneously.
Thus, revenue can be recognised when the expenses cannot be measured

reliably. In such situation, any consideration already received for the sale of
the goods is recognised as a liability.
The following examples are stated in Appendix A of MASB 9. Generally, we

assume that the amount of revenue can be measured reliably. It is probable that
the economic benefits will flow to the entity and the costs incurred or to be
incurred can be measured reliably.
Table 1.3: Type of Sale Transaction and Revenue Recognition
Type of Sale Transaction Revenue Recognition

1. ÂBills and holdÊ sales, in which When the buyer takes title, provided:
delivery is delayed at the buyerÊs (a) Delivery is probable;
request but the buyer takes title and
(b) Item is on hand, identified and
accept billing
ready for delivery;
(c) Buyer acknowledges the deferred
delivery; and
(d) Usual payment terms apply.
2. Goods shipped subject to conditions:
(a) Installation and inspection When the buyer accepts delivery and
installation an inspection are complete.
Recognised immediately upon the buyerÊs
acceptance when:
(i) The installation process is simple in
nature, for example, installation of a
factory tested television receiver
which only requires unpacking and
connection of power and antennae;
or
(ii) The inspection is performed only
for the purposes of final
determination of contract prices, for
example, shipments of iron ore,
sugar or soya beans.
(b) On approval when the buyer If there is uncertainty about the

has negotiated a limited right possibility of return, revenue is
of return recognised when the shipment has been
formally accepted by the buyer or the
goods have been delivered and the time
period for rejection has elapsed.
(c) Consignment sales under When the goods are sold by the recipient
which the recipient (buyer) to a third party.
undertakes to sell the goods on
behalf of the shipper (seller)
(d) Cash and delivery sales When delivery is made and cash is
received by the seller or its appointed
agent.
3. Lay away sales under which the goods When the goods are delivered. When
are delivered only when the buyer experience indicates that most such
makes the final payment in a series of sales are consummated, revenue may be
instalments recognised when a significant deposit is
received provided the goods are on hand,
identified and ready for delivery.
4. Orders when payment (or partial When the goods are delivered to the
payment) is received in advance of buyer.
delivery for goods not presently held
in inventory, for example, the goods
are still to be manufactured or will
be delivered directly to the customer
from a third party
5. Sales and repurchases agreements Need to ascertain whether, in substance,

(other than swap transactions) under the seller has transferred the risks and
which the seller concurrently agrees rewards of ownership to the buyer and
to repurchase the same goods at a hence revenue recognised. When risks
later date, or when the seller has a and rewards of ownership are retained,
call option to require the repurchase, the transaction is a financing arrangement
by the seller, of the goods and does not give rise to revenue.
6. Sales to intermediate parties, such When the risks and rewards of ownership
as distributors, dealers or others for have passes. However, when buyer is
resale acting in substance, as an agent, the sale is
treated as a consignment sale.
7. Subscriptions to publications and Straight line basis over the period in

similar items which the items are dispatched, for items
of similar value in each period.
Basis of the sales value of the item
dispatched in relation to the total
estimated sales value of all items covered
by the subscriptions, for items that vary in
value from period to period.
8. Instalment sales, under which At date of sale, revenue is recognised
the consideration is receivable based on sale price. Sale price is the
instalments present value of instalments receivable,
discounted at an imputed rate of interest
(equivalent cash sale price may be use).
Interest element is recognised as revenue
as it is earned, on a time proportion basis
that takes into account the imputed rate of
interest.
9. Real estate sales

(i) Normal sales and seller has When legal title passes to the buyer. If
no further substantial act to equitable interest in a property vests with
perform the buyer before title passes, revenue
recognised when risks and rewards of the
ownerships have been transferred, i.e., at
the time when the equitable interest vests
with the buyer.
(ii) Significant acts need to be Revenue is recognised as the acts are
performed after the transfer of performed (for example, based on stage of
equitable and/or legal title completion in the construction of a
building).
(iii) Sale with a degree of continuing The nature and extent of the sellerÊs
involvement by the seller, such continuing involvement determines how
that risks and rewards of the transaction is accounted for. It may be
ownership have not been accounted for as a sale, or a financing,
transferred. Examples are sale leasing or some other profit sharing
and repurchase agreements arrangement. If it is accounted for as
which include put and call a sale, the continuing involvement of
options, and agreement the seller may delay the recognition of
whereby the seller guarantees revenue.
occupancy of the property for a
specified period, or guarantees
a return on the buyerÊs
investment for a specified
period.
Source: Adapted from MASB 9 (Appendix A)
Example 4
Everlasting Sdn. Bhd., a manufacturer, ships goods to retailers who act as the
manufacturerÊs agent. In the beginning of the year 2006, goods costing
RM100,000 was sent to one of the retailer in Kuala Lumpur. At 31 December
2006, only RM30,000 of the goods was sold. The financial year end of
Everlasting Sdn. Bhd. is 31 December.
Required
Determine the amount of revenue should be recognised in Everlasting Sdn.
Bhd. in financial year end 2006 and accounting treatment for the unsold
goods.
Solution
Revenue of RM30,000 should be recognised in the year ended December 31,
2006. The unsold goods of RM70,000 will be shown as part of the Everlasting
Sdn. Bhd. inventory in balance sheet.
Example 5
SenQ Sdn. Bhd. sells electrical product with zero interest rate installment. On
5 December 2006, a customer purchased a flat screen television at RM8,000 by
paying 10% down payment and signed an agreement on the same day. The
balance will be paid in 12 monthly instalments beginning on 1 January 2007.
Required
When should revenue be recognised in the above scenario.
Solution
Revenue should be recognised on 1 December 2006.
ACTIVITY 1.3
What companies are receiving service revenue?
1.3.2 Recognition of Service Revenue
SELF-CHECK 1.2
Differentiate the following:

(a) Revenue recognition of sale of goods
(b) Revenue recognition of services rendered
The main different is that we need to determine the stage of completion for the
transaction at the balance sheet date as we know that performance of service may
stretch over several accounting periods. For instance, we may need three years to
complete a flyover.
MASB 9 prescribes that:
„when the outcome of a transaction involving the rendering of service

can be estimated reliably, revenue associated with the transaction
should be recognised by reference to the stage of completion of the
transaction at the balance sheet date‰.
From the above paragraph, we must know two things:

(a) Estimate the outcome reliably.
(b) Determine the stage of completion at every balance sheet date.
The outcome of a transaction can be measured reliably when all of the following
conditions are satisfied:
(i) The amount of revenue can be measured reliably;
(ii) It is probable that the economic benefits associated with the transaction will
flow to the enterprise;
(iii) The stage of completion of the transaction at the balance sheet date can be
measured reliably; and
(iv) The costs incurred for the transaction and the costs to complete the
transaction can be measured reliably [para 21].
The recognition of revenue by reference to the stage of completion of a

transaction is commonly referred to as the percentage of completion method.
Under this method, revenue is recognised in the accounting periods in which the
services are rendered. We have few methods to determine the stage of
completion and these include:
(i) Surveys of work performed;
(ii) Services performed to date as a percentage of total services to be
performed; and
(iii) The proportion that costs incurred to date bear to the total estimated total
costs of the transaction.
When the outcome of the transaction involving the rendering of services cannot
be estimated reliably, revenue should be recognised only to the extent of the
expenses recognised that are recoverable (para 27).
When the outcome of the transaction cannot be estimated reliably but it may be
probable that the enterprise will recover the transaction costs incurred, we can
recognise the revenue up the extent of costs incurred that are expected to be
recoverable. If in a situation where costs incurred will not be probable to be
recovered, revenue is not recognised and the costs incurred are recognised as
expenses.
Example 6
Speedy Sdn. Bhd. wins a contract to build a multipurpose hall. The total
contract price is RM500,000, costs are estimated to be RM400,000 and
construction is expected to take two years to complete. As at 31 December
2005, Speedy Sdn. Bhd. has incurred RM180,000 and the value of work
certified by an independent architect is RM160,000.
Required
(a) Measure the stage of completion by reference to:
(i) Costs incurred to date and
(ii) Value of work certified.
(b) Assuming that Speedy applies the percentage of completion method and
uses cost incurred as the basis to measure stage of completion,
determine the amount of revenue recognised in financial year ended 31
December 2005.
Solution
(a) Stage of completion measured by reference to contract costs incurred to
date is:
= Contract cost incurred to date / Estimated total contract costs
= 180,000 / 400,000 = 45%
Stage of completion measured by value of work certified is:
= Value of work certified / Total contract revenue
= 160,000 / 500,000 = 32%
(b) Revenue = 45%  RM500,000
= RM225,000
Revenue arising from the use by others of enterprise assets yielding interest,
royalties and dividends should be recognised on the following bases:
(a) Interest should be recognised on a time proportion basis;
(b) Royalties should be recognised on an accrual basis in accordance with the
substance of the relevant agreement; and
(c) Dividends should be recognised when the shareholderÊs right to receive
payment is established.
Example 7
Starlight Sdn. Bhd., a manufacturing company placed a fixed deposit of
RM100,000 in Public Bank Bhd. on 1 December 2006. The current interest is 6%
per annum payable at the end of each year. The company closes its accounts
to 31 December every year.
At 31 December 2006 the interest earned by Starlight Sdn. Bhd. will be

RM100,000  6%  1/12 = RM500.
Example 8
Ozone Technology Sdn. Bhd. is a Malaysian manufacturing company which is
using a secret processes from Top Ozone Bhd. Under an agreement, royalty
payable to Top Ozone Bhd is 2% on its net annual sales. During the year 2006,
net annual sales of Ozone Technology Sdn. Bhd. was RM3,000,000. Therefore,
the royalty income that can be recognised as revenue by Top Ozone will be
2%  RM3,000,000 = RM60,000.
Example 9
Cold Stone Sdn. Bhd. holds 100,000 ordinary shares in Exit Bhd., Directors of
Exit Bhd. proposed a dividend of 7% for financial year ended 31 December
2006 at the annual general meeting held on 15 May 2007.
Cold Stone Sdn. Bhd. should recognise the dividend income on 15 May 2007
since the company only has the right to receive the dividends when it is
declared.
The following examples are stated in Appendix A of MASB 9. It is generally

assume that the amount of revenue can be measured reliably, it is probable that
the economic benefits will flow to the entity and the costs incurred or to be
incurred can be measured reliably.
Table 1.3: Type of Service Rendering Transaction and Revenue Recognition
Type of Service Rendering

Revenue Recognition
Transaction
1. Installation fees 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.
2. Servicing fees included in When the selling price of a product includes an

the price of the product identifiable amount for subsequent servicing (for
example, after sales support and product
enhancement on the sale of software), that amount is
deferred and recognised as revenue over the period
during which the service is performed. The amount
deferred is that which will cover the expected costs
of the services under the agreement, together with a
reasonable profit on those services.
3. Advertising commissions Media commissions are recognised when the related

advertisement or commercial appears before the
public. Production commissions are recognised by
reference to the stage of completion of the project.
4. Insurance agency Insurance agency commissions received or

commissions receivable which do not require the agent to render
further service are recognised as revenue by the
agent on the effective commencement or renewal
dates of the related policies. However, when it is
probable that the agent will be required to render
further services during the life of the policy, the
commission, or part thereof, is deferred and
recognised as revenue over the period during which
the policy is in force.
5. Admission fees Revenue from artistic performances, banquets and

other special events is recognised when the event
takes place. When a subscription to a number of
events is sold, the fee is allocated to each event on a
basis which reflects the extent to which services are
performed at each event.
6. Tuition fees Revenue is recognised over the period of instruction.

7. Initiation, entrance and Revenue recognition depends on the nature of the

membership fees 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 collectability
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.
8. Fees from the development Fees from the development of customised software
of customised software are recognised as revenue by reference to the stage
of completion of the development, including
completion of services provided for post-delivery
service support.
1.4 DISCLOSURE REQUIREMENTS

MASB 9 [para 36] requires the disclosure of the accounting policies adopted for
the recognition of revenue, including the methods adopted to determine the
stage of completion of the transactions involved in the rendering of services.
MASB 9 also requires the disclosure of revenue arising from the following:
(a) Sales of goods;
(b) Income from the rendering of services;
(c) Interest;
(d) Royalty;
(e) Dividends; and
(f) The amount of revenue arising from exchanges of goods or services

included in each significant category of revenue.
The Ninth Schedule of the Companies Act 1965 requires the separate disclosure
of the following income items:
(a) Income received from anyshares and debentures listed on the KLSE;
(b) Income received from any shares and debentures traded on any stock
Exchange outside Malaysia;
(c) Income received from other sources;
(d) Interest income other than from debentures; and
(e) Income from rent of land and buildings.
ACTIVITY 1.4
Find out how revenue are presented and disclosed in the annual
audited accounts from the website of Bursa Malaysia at
http://www.klse.com.my
The following example is taken from the notes to the accounts of an annual
report of a Malaysian company. It illustrates the accounting policy for revenue
and disclosure practice based on MASB 9 on revenue.
Example 9
CAB CAKARAN CORPORATION BERHAD
Year ended 30 September 2005
Extract from notes to accounts
Significant Accounting Policies
Revenue
Sale of goods are recognised upon delivery of products and when the risks
and rewards of ownership have passed. Sale represent gross invoiced value of
goods sold net of sales tax, returns and discounts.
Revenue
The Group The Company
2005 2004 2005 2004
RM RM RM RM
Sale of goods 350,841,247 211,371,992 ă ă

Franchise income:
Current year 50,000 1,204,247 ă ă
Reversal of amounts
recognised in (69,500) ă ă ă
prior year
Royalties income 119,899 216,601 ă ă
Gross dividend income
from a subsidiary ă ă 2,750,000 2,750,000
company
Management fee ă ă 180,000 10,000
350,941,646 212,792,840 2,930,000 2,760,000
Ć Income includes revenue and gains.

Ć Revenue arises from the course of ordinary activity of an enterprise.
Ć Revenue gives rise to a net inflow of economic resources that may either
increase the assets or reduce liability.
Ć The problem faced is at what point is revenue recognised and the amount
that can be recognised.
Ć Students are to be informed that MASB 9 was replaced by FRS 118 with effect
from 1 January 2006 for non-private entities in Malaysia.
Ć A private entity is a private company, incorporated under the Companies Act
1965, that:
(a) Is not itself required to prepare or lodge any financial statements under
any law administered by the Securities Commission or the Bank Negara
Malaysia; and
(b) Is not a subsidiary or associate of, or jointly controlled by, an entity
which is required to prepare or lodge any financial statements under
any law administered by the Securities Commission or the Bank Negara
Malaysia
Ć Therefore, for public listed companies with the year-end of 31 December
2006, the 1st quarter announcement on 31 May 2006 will be the first
published results under FRS.
Fair Value Revenue
Probable Reliability
1. Home Kits Enterprise sells goods where customers have the right to return
the products purchased if they are not satisfied.
Required
What are the conditions that must be satisfied before revenue can be
recognised?
2. Reliability is one of the important criteria in determining the timing of

revenue recognition. Discuss.
3. Consider the following independent cases. The accounting year ends on

December 31 in each case.
(i) On 31 December 2006, Carigali Sdn. Bhd. sold specialised equipment

for RM600,000 and collected RM220,000 cash. The balance plus 10%
interest is payable on 31 December 2007. Carigali Sdn. Bhd. will
deliver the equipment on 15 February 2007. The buyer has an
excellent credit rating.
(ii) On October 15th 2006, Sootex Sdn. Bhd. sold a ton of its product for
RM8,000. The buyer will pay for the product with two units of its own
goods. The buyer promised to deliver the goods on 31 January 2007.
(iii) On March 1st 2006, Tan Mark Sdn. Bhd. collected RM1,440 cash for a
four-year subscription to a monthly journal, World Discovery. The
May 2006 issue will be the first one mailed to the subscriber.
Required
For each of the above cases:
(a) Advise on the revenue recognition method that should be used.

Justify your answer.
(b) Prepare journal entries to reflect the transaction, if any.
1. When should revenue be recognised in the following independent

circumstances? In all cases, the financial year-end is 31 December 2006.
(a) HLS Electrical sold goods at selling price of RM15,000 were sent out
on 14 day Âsale on return basisÊ on 12 December 2006 which were not
returned by the balance sheet.
(b) An insurance agent received commission of RM4,000 from selling

25-year life insurance policy.
(c) IFEEL Furniture received RM1,000 cash from a customer as down

payment on 1 November and signed an agreement on the same day.
The balance will be paid in 12 monthly instalments beginning on
1 December 2006.
(d) Receipt of RM40,000 in November 2006 from ticket sales for a musical
concert by Girl Power which will be staged in January 2007.
(e) An antique shop received RM2000 from a customer to purchase a

vase. The customer can take the possession of vase after paying
another RM2,000 before delivery.
(f) A gift shop received RM250 from a young man on 30 December 2006
to deliver a teddy bear and a bouquet of flowers to his wife on
7 January 2007.
2. The following are independent transactions of various business enterprises.

The financial year end is on 31 December 2006 for all the enterprise.
(a) On 1 Mac 2006, Cheok Enterprise deposited a RM20,000 in a fixed

deposit account with Sakura Bank for 15-month period, interest rate
being 6% per year.
(b) Institute Berjaya collected tuition fee of RM600 each from 450 students
in August 2006. Only 289 students attended tuition in year 2006, the
rest will commence classes in January 2007.
(c) Piecemeal Services has been given a contract of RM100,000 to install

wiring in August 2006. By 31 December 2006, Piecemeal Services had
completed 35% of the work.
(d) A customer, Madam Dorris has instructed Modern Furniture Trading

to make delivery of goods of RM3,000 only after 14 February 2007
which should be delivered in December 2006. Full payment has been
received.
(e) Rock Music will organise a cultural performance at Stadium Merdeka

on 31 March 2007 for fund raising. Up until 31 December 2006, 6,000
tickets of RM300 each have been sold to the public.
Required
Explain briefly when and the amount of revenue should be recognised.

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Topic  Revenue

Revenue is the income sources of an organisation. The revenue measurement and

Can you differentiate among sale, income, turnover and revenue?

Do you know what revenue is?

MASB 9 defines revenues as:

Now, let us consider a situation where a hotel receives compensation of damages

So, what is the different between revenue and income?

The Framework for the Preparation and Presentation of Financial Statements

1. In the case of a trading company, what are the ordinary activities

1.2 MEASUREMENT OF REVENUE

1.3 REVENUE RECOGNITION

Can you differentiate between cash discount and trade discount?

After determining the amount to be recorded, we now need to determine the

Figure 1.1: The operating cycle of trading company

It is necessary to determine a point in the operating cycle at which to recognise

According to MASB, revenue is recognised when it is probable that future

In short, we can recognise revenue when the revenue is measurable and it is

1.3.1 Recognition of Sales of Goods

Table 1.1: Conditions that Permits the Recognition of Sales of Goods

(a) Risks and Rewards of Ownership and Continuing Managerial Involvement

If the enterprise retains significant risks and reward incident to ownership,

retain the significant risks and rewards of ownership, as tabulated by

Table 1.2: Situations and Risks

Types of Risks Explanation

Therefore, we might want to consider the following factors when we are

(b) Economic Benefit

In an arm length transaction, we can refer to the documentary evidence

(c) Costs Incurred

Thus, revenue can be recognised when the expenses cannot be measured

The following examples are stated in Appendix A of MASB 9. Generally, we

Table 1.3: Type of Sale Transaction and Revenue Recognition

Type of Sale Transaction Revenue Recognition

(b) On approval when the buyer If there is uncertainty about the

5. Sales and repurchases agreements Need to ascertain whether, in substance,

7. Subscriptions to publications and Straight line basis over the period in

9. Real estate sales

Source: Adapted from MASB 9 (Appendix A)

What companies are receiving service revenue?

1.3.2 Recognition of Service Revenue

Differentiate the following:

MASB 9 prescribes that:

„when the outcome of a transaction involving the rendering of service

From the above paragraph, we must know two things:

The recognition of revenue by reference to the stage of completion of a

At 31 December 2006 the interest earned by Starlight Sdn. Bhd. will be

The following examples are stated in Appendix A of MASB 9. It is generally

Table 1.3: Type of Service Rendering Transaction and Revenue Recognition

Type of Service Rendering

1. Installation fees Installation fees are recognised as revenue by

2. Servicing fees included in When the selling price of a product includes an

3. Advertising commissions Media commissions are recognised when the related

4. Insurance agency Insurance agency commissions received or

5. Admission fees Revenue from artistic performances, banquets and

6. Tuition fees Revenue is recognised over the period of instruction.

7. Initiation, entrance and Revenue recognition depends on the nature of the

1.4 DISCLOSURE REQUIREMENTS

(a) Sales of goods;

(b) Income from the rendering of services;

(e) Dividends; and

(f) The amount of revenue arising from exchanges of goods or services

(c) Income received from other sources;

(d) Interest income other than from debentures; and

(e) Income from rent of land and buildings.