by IAS 18 Revenue outlines the accounting requirements for when to recognise revenue from the sale of goods, rendering of services, and for interest, royalties and dividends. Revenue is measured at the fair value of the consideration received or receivable and recognised when prescribed conditions are met, which depend on the nature of the revenue.
The primary issue in accounting for revenue is determining when to recognise revenue. Revenue is recognised when it is probable that future economic benefits will flow to the entity and these benefits can be measured reliably. This Standard identifies the circumstances in which these criteria will be met and, therefore, revenue will be recognised. It also provides practical guidance on the application of these criteria.
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.
Recognition of revenue
Recognition, as defined in the IASB Framework, means incorporating an item that meets the definition of revenue (above) in the income statement when it meets the following criteria:
- The amount of revenue can be measured with reliability.
- It is probable that any future economic benefit associated with the item of revenue will flow to the entity.
Measurement of revenue
Revenue should be measured at the fair value of the consideration received or receivable. [IAS 18.9] An exchange for goods or services of a similar nature and value is not regarded as a transaction that generates revenue. However, exchanges for dissimilar items are regarded as generating revenue. [IAS 18.12]
If the inflow of cash or cash equivalents is deferred, the fair value of the consideration receivable is less than the nominal amount of cash and cash equivalents to be received, and discounting is appropriate. This would occur, for instance, if the seller is providing interest-free credit to the buyer or is charging a below-market rate of interest. Interest must be imputed based on market rates. [IAS 18.11]
Sale of goods
Revenue arising from the sale of goods should be recognised when all of the following criteria have been satisfied: [IAS 18.14]
- The seller retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold.
- The seller has transferred to the buyer the significant risks and rewards of ownership.
- It is probable that the economic benefits associated with the transaction will flow to the seller.
- The costs incurred or to be incurred in respect of the transaction can be measured reliably.
- The amount of revenue can be measured reliably.
Rendering of services
For revenue arising from the rendering of services, provided that all of the following criteria are met, revenue should be recognised by reference to the stage of completion of the transaction at the balance sheet data (the percentage-of-completion method): [IAS 18.20]
When the outcome of a transaction involving the rendering of services can be estimated reliably, revenue associated with the transaction shall be recognised by reference to the stage of completion of the transaction at the end of the reporting period. The outcome of a transaction can be estimated reliably when all the following conditions are satisfied:
(a) The amount of revenue can be measured reliably.
(b) It is probable that the economic benefits associated with the transaction will flow to the entity.
(c) The stage of completion of the transaction at the end of the reporting period can be measured reliably; and (d) the costs incurred for the transaction and the costs to complete the transaction can be measured reliably.
- It is probable that the economic benefits will flow to the seller.
- The amount of revenue can be measured reliably.
- The costs incurred, or to be incurred, in respect of the transaction can be measured reliably.
- The stage of completion at the balance sheet date can be measured reliably.
Interest, Royalties, and Dividends
Revenue arising from the use by others of entity assets yielding interest and royalties shall be recognised when:
(a) The amount of the revenue can be measured reliably.
(b) It is probable that the economic benefits associated with the transaction will flow to the entity.
For interest, royalties and dividends, provided that it is probable that the economic benefits will flow to the enterprise and the amount of revenue can be measured reliably, revenue should be recognised as follows: [IAS 18.29-30]
- Royalties: on an accrual’s basis in accordance with the substance of the relevant agreement.
- Interest: using the effective interest method as set out in ias 39
- Dividends: when the shareholder’s right to receive payment is established.
Disclosure [IAS 18.35]
Accounting policy for recognising revenue amount of each of the following types of revenue:
- Sale of goods
- Rendering of services
- Interest
- Royalties
- Dividends
- Within each of the above categories, the amount of revenue from exchanges of goods or services
