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GODFREY

HODGSON
HOLMES
TARCA

CHAPTER 9
REVENUE
Revenue defined

Income
Income isis increases
increases in in economic
economic benefits
benefits during
during
the
the accounting
accounting period
period inin the
the form
form of
of inflows
inflows
or
or enhancements
enhancements of of assets
assets or
or decreases
decreases of of
liabilities
liabilities that
that result
result in
in increases
increases in
in equity,
equity,
other
other than
than those
those relating
relating toto contributions
contributions
from
from equity
equity participants.
participants.
AASB
AASBFramework
Framework

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Revenue defined
• Revenue represents a physical and a
monetary flow
• Revenue is an inflow of economic benefits
• Revenue forms part of income – which also
includes gains – and arises in the course of
ordinary activities
• Examples are sales, fees, interest, dividends,
royalties and rents

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Behavioural view of revenue
• Revenues are the result of firm activity
• Net accomplishment of firm
– revenue = accomplishment
– expense = effort
– matching results in profit = net accomplishment
• A point of recognition must be determined
– critical event
– accrual throughout earnings process

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Revenue recognition
Historical perspective
• Profit (and revenue) determined on the basis
of the increase in the net worth of the firm
• Supplanted by the notion that profit and
revenue had to be realised
• Developed into the revenue recognition
principle (or realisation principle)
• A distinction between capital and profit
emerged from court rulings
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Criteria for revenue recognition

At
At what
what point
point during
during the
the earning
earning process
process can
can
revenue
revenue be
be recorded
recorded as as earned
earned because
because there
there
isis sufficient
sufficient evidence?
evidence?

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Criteria for revenue recognition

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Criteria for revenue recognition
• Recognition criteria are based on the desire
for both relevant and reliable accounting
information
– measurability of asset value
– existence of a transaction
– substantial completion of the earning process

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Revenue measurement
• Framework – provides 2 criteria for revenue
recognition
– it is probable that any future economic benefit
associated with the item will flow to or from the
entity
– the item has a cost or value that can be
measured with reliability

Revenue recognition is not straightforward because of the wide range of


different business revenue-generating activities and circumstances

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Revenue measurement
• IAS 18/AASB 118 Revenue
– revenue is to be measured at the fair value of the
consideration received or receivable

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Sale of goods
• The sales point is generally the most
appropriate point to measure and record
revenue as all three criteria are met
• The sales point is when the product is
delivered or the services are rendered, or
when title passes to the customer

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Exceptions to sales basis
• Exceptions to using the sale point are
– revenue recognised during production
• e.g. construction contracts
– revenue recognised at the end of production
• production is the critical event and the sale is assured
– revenue recognised when cash is received after
the sale is made
• instalment method and the cost recover method

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Rendering of services
• Service revenue is to be recognised by
reference to the stage of completion
• It is recognised in the period in which the
service is rendered

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Interest, royalties and dividends
• Can be recognised when received
• For some items, the passing of time signifies
revenue has been earned
– e.g. interest revenue

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Developments in revenue
recognition and measurement
• IASB/FASB joint project
• Void in revenue recognition and measurement
guidance and a lack of a conceptual basis for
resolving issues
• Revenue transactions have become more
complex

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Developments in revenue
recognition and measurement
• They propose
– recognising revenues when they arise
– measuring them at fair value at that point
– measuring them when they arise from an increase
in assets or a decrease in liabilities, at the fair
value of that change

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Developments in revenue
recognition and measurement
• Resulting changes in emphasis
– revenue is recognised when it arises
• changes emphasis from realisation to timeliness
– revenue can result from the changes in asset and
liability values and from holding assets
• that is, from remeasurements
– revenue recognition and measurement reflect fair
value
– measurement should be reliable

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Developments in revenue
recognition and measurement
• Tentative agreement that two criteria must be
met to recognise revenue
– a change in assets or liabilities must have occurred
• the elements criterion
– the change in assets or liabilities can be
appropriately (reliably) measured
• the measurement criterion
– no probability criterion
There is less emphasis on ‘substantial completion of the earnings process’ and
on notions of ‘realisation’ and ‘earned’

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Fair value measurement
• Under a mixed measurement attribute model,
all items are measured at fair value at
acquisition and thereafter are carried at
historical cost or written down historical cost
although some items are subsequently
remeasured to fair value
• Gains and losses are recognised when they
occur even if they are unrealised

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Financial statement
presentation
• IASB/FASB joint project
• Tentative conclusions are
– an all-inclusive, single income statement where all
changes to assets and liabilities will be disclosed
– realisation is not the basis for inclusion of items
– separate disclosure of performance (income
flows) and remeasurement (valuation
adjustments)

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Issues for auditors
• Primary issue is the overstatement of
revenues by managers
– intention is to deceive users
– bonuses
– managing earnings
– over-optimism
– fraud

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Summary
• Issues relating to the definition, measurement and recognition
of revenue
• Critical recognition points
• Criteria for revenue recognition
• Revenue measurement
• Guidance provided by standard setters
• Current projects and developments
• Issues for auditors

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Key terms and concepts
• Revenue
• Behavioural view of revenue
• Earning process
• Criteria for revenue recognition
• Point of sale
• Fair value
• Sales of goods and the rendering of services

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