Revenue is income arising in the ordinary course of an entity’s activities and it may be called by different names,
\nsuch as sales, fees, interest, dividends or royalties.<\/p>\n

It is important to establish the point at which revenue may be recognized so that the correct treatment can be applied to the related costs.<\/p>\n

IAS 18 governs the recognition of revenue in specific types of transaction. Generally, recognition should be when it is probable that future economic benefits will flow to the entity and when these benefits can be measured reliably.<\/p>\n

IAS 18 is concerned with the revenue recognition of arising from following types of transactions or events<\/p>\n

\n
• \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 The Sales of Goods<\/li>\n
• \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 The rendering services<\/li>\n
• \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Interests, royalties and dividends<\/li>\n<\/ul>\n

  Interest, royalties and dividends are included as income because they arise from the use of an entity\u2019s assets by other parties.<\/p>\n

  Interest is the charge for the use of cash or cash equivalents or amounts due to the entity.<\/p>\n

  Royalties are charges for the use of non-current assets of the entity, e. g. patents, computer software and trademarks.<\/p>\n

  Dividends are distributions of profit to holders of equity investments, in proportion with their holdings.<\/p>\n

  IAS 18 is NOT applicable to revenue arising from leases, insurance contracts, changes in value of financial instruments or other current assets, natural increase in agricultural assets and mineral ore extraction.<\/p>\n

  Definition of revenue:<\/strong><\/p>\n

  \u00a0<\/strong>Revenue is the gross inflow of economic benefits during the period arising in the course of ordinary activities of an entity when those inflow results in increase in equity, other than increases relating to contribution from equity participants.<\/p>\n

  Recognition of Revenue:<\/strong><\/p>\n

  \u00a0<\/strong>Generally revenue is recognized when the entity has transferred the significant risks and rewards of ownership to the buyer and when the revenue can be measured reliably.<\/p>\n

  Revenue from the sale of goods<\/strong> should only be recognized when ALL these conditions are satisfied.<\/p>\n

  1.\u00a0\u00a0\u00a0\u00a0 The entity has transferred the significant risks and rewards of ownership of the goods to the buyer<\/p>\n

  2.\u00a0\u00a0\u00a0\u00a0 The entity does not retain the managerial involvement or effective control over the goods.<\/p>\n

  3.\u00a0\u00a0\u00a0\u00a0 The amount of revenue can be measured reliably<\/p>\n

  4.\u00a0\u00a0\u00a0\u00a0 It is probable that the economic benefits associated with the transaction will flow to the entity<\/p>\n

  5.\u00a0\u00a0\u00a0 The costs incurred in respect of the transaction can be measured reliably<\/p>\n

  The transfer of risks and rewards can only be decided by examining each transaction. If significant risks and rewards remain with the seller, then the transaction is not a sale and revenue cannot be recognized.<\/p>\n

  The revenue and expenses relating to the same transaction should be recognized at the same time. It is usually easy to estimate expenses at the date of sale (e.g. warranty costs, shipment costs, etc.). When they cannot be estimated reliably, then revenue cannot be recognized; any consideration which has already been received is treated as a liability.<\/p>\n

  Example- 1<\/strong><\/p>\n

  A computer sells for $500 with a one-year warranty. The dealer knows from experience that 15% of these machines
  \ndevelop a fault in the first year and that the average cost of repair is $100. He sells 2000 machines. How does he account for this sale?<\/p>\n

  Solution<\/strong><\/p>\n

  The warranty has to be separately accounted from sale of goods.<\/p>\n

  Revenue deferred ($100 x 2000 x 15%) =$30000<\/p>\n

  Revenue recognized for sale of goods ($500 X 2000) – $ 30000 =
  \n$970,000<\/p>\n

  Example- 2<\/strong><\/p>\n

  Taxation software is sold with one year’s after sales support. The cost of providing support to one customer for one year is calculated to be $900. The company has a margin of 10%. The product is sold for $10000. How is this sale accounted for?<\/p>\n

  Solution<\/strong><\/p>\n

  Revenue deferred ($900*100\/90) =$1000<\/p>\n

  Revenue recognized for sale of goods $ 10000 -$1000 = $9000<\/p>\n

  Revenue from the rendering service<\/strong> should only be recognized when ALL these conditions are satisfied<\/p>\n

  1.\u00a0\u00a0 The amount of revenue can be measured reliably<\/p>\n

  2.\u00a0\u00a0 It is probable that the economic benefits associated with the transaction will flow to the entity<\/p>\n

  3.\u00a0\u00a0 The stage of completion of the transaction at the end of the reporting period can be measured reliably<\/p>\n

  4.\u00a0\u00a0 The costs incurred for the transaction and the costs to complete the transaction can be measured reliably<\/p>\n

  \u00a0Substance over form<\/strong><\/p>\n

  \u00a0The principle is that transactions and other events are accounted for and presented in accordance with their substance and economic reality and not merely their legal form.<\/p>\n

  Example<\/strong><\/p>\n

  XYZ Ltd sold the land to bank for $50 million. The land has book value of $25 million and market value of $60 million as on the date of sale. XYZ Ltd is continue to use the land and has call option to buy a land after two years. The bank has put option to sell the land to XYZ Ltd for $55 million after two years.<\/p>\n

  Solution<\/strong><\/p>\n

  In order to recognize the revenue for XYZ Ltd for this transaction it is necessary to transfer risk and reward to bank. There are following factors showing that this sales transaction has not taken place.<\/p>\n

  1.\u00a0\u00a0\u00a0\u00a0 Sales price of land is less than market value<\/p>\n

  2.\u00a0\u00a0\u00a0\u00a0 XYZ Ltd is continue to use land<\/p>\n

  3.\u00a0\u00a0\u00a0\u00a0 There is the certainty that land will be repurchased by the XYZ Ltd after two years.<\/p>\n

  Risk and reward has been not transferred. Therefore, revenue cannot be recognized. The receipts of $50 million should be shown as financial liability and the difference between sales price and repurchase price, i.e. $5 million ($55million-$50million) should be shown as finance cost over the period of two years.<\/p>\n

  Disclosure:<\/strong><\/p>\n

  The following items should be disclosed.<\/p>\n

  (a) The accounting policies adopted for the recognition of revenue, including the methods used to determine the stage of completion of transactions involving the rendering of services<\/p>\n

  (b) The amount of each significant category of revenue recognized during the period including revenue arising from:<\/p>\n

  1.\u00a0\u00a0\u00a0\u00a0 The sale of goods<\/p>\n

  2.\u00a0\u00a0\u00a0\u00a0 The rendering of services<\/p>\n

  3.\u00a0\u00a0\u00a0\u00a0 Interest<\/p>\n

  4.\u00a0\u00a0\u00a0\u00a0 Royalties<\/p>\n

  5.\u00a0\u00a0\u00a0\u00a0 Dividends<\/p>\n

  (c) The amount of revenue arising from exchanges of goods or services included in each significant category of revenue<\/p>\n","protected":false},"excerpt":{"rendered":"

  Revenue is income arising in the ordinary course of an entity’s activities and it may be called by different names, such as sales, fees, interest, dividends or royalties. It is important to establish the point at which revenue may be recognized so that the correct treatment can be applied to the related costs. IAS 18 … Read more<\/a><\/p>\n","protected":false},"author":18,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_uag_custom_page_level_css":"","_mi_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[8],"tags":[180,179],"class_list":["post-1551","post","type-post","status-publish","format-standard","hentry","category-ifrs","tag-ias","tag-ifrs"],"yoast_head":"\n