IAS 18 Revenue

1. Scope :-

Sources of Revenue

1. Sale of Goods
2. Rendering of Services
3. Use of entity assets yielding interest, royalties and dividends

2. Definitions :-

1. Revenue: Gross inflow of economic benefits arising in the course of ordinary activities when those inflows result in increases in equity, other then increases relating to contributions from equity participants.
2. Fair Value: The amount for which an asset could be exchanged or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.

3 Measurement of revenue:-

· Revenue should be measured at the fair value of the consideration received or receivable (taking into account trade discounts and volume rebates allowed).

· When consideration is deferred the difference between the fair value and the nominal amount of consideration is recognized to be) as interest revenue.

· When goods or services are swapped revenue is only generated if the exchange is for dissimilar goods or services.

4 Sale of goods:-

· Revenue recognition criteria

o Significant risks and rewards are transferred to the buyer:

o Neither continuing managerial involvement nor effective control over goods sold are retained:

o The amount of revenue can be measured reliably:

o It is probable that economic benefits associated with the transaction will flow to the entity: and

o Costs (to be) incurred in respect of the transaction can be measured reliably.

If legal title passes but risk and rewards are retained, no sale should be recognized. For example, where:

o The entity retains obligation for unsatisfactory performance not covered by normal warranty provisions: or

o The receipt of revenue is contingent on the buyer selling the goods on ; or

o Goods are to be installed and installation is a significant part of the contract and remains uncompleted; or

o The buyer has the right to rescind and the seller is uncertain about the outcome.

If legal title does not pass but the risk and rewards do then the transaction should be recognized as a sale.

· Cost recognition

o Usually revenue and expenses are to be recognized simultaneously (and so ‘’matched in the same accounting period).

o Expenses can normally be measured reliably when other conditions for revenue recognition have been satisfied (i.e. costing goods is normally a perquisite for setting a selling price).

o Revenue can not be recognized when the related cost cannot be measured reliably. In such cases proceeds should be recognized as a liability not a sale.

5 Rendering of services :-

· Revenue is recognized by reference to the stage of completion of the transaction at the balance sheet date (but only if the outcome can be estimated reliably).

· Stage of completion should be estimated using the method that measures reliably the services performed. This ay includes:-Surveys of work completed, Services performed as a percentage of total services, Proportion of costs to total estimated costs.

· If outcome cannot be measured reliably recognize the revenue only to the extent of the expenses recognized that are recoverable.

· Reliable estimate of outcome is subject to the following conditions (all must be satisfied)

o The amount of revenue can be measured reliably.

o It is probable that the economic benefits associated with the transaction will flow to the entity.

o The stage if completion of the transaction can be measured reliably.

o Costs to complete can be measured reliably.

6 Interest, royalties and dividends:-

· Revenue recognition criteria:

o It Is probable that economic benefits will flow to the entity:

o The amount of the revenue can be measured reliably:

· Recognition bases:

o Interest – a time proportion basis:

o Royalties – an actual basis in accordance with the substance of the agreement:

o Dividends – when the share holder’s right to receive payment is established.

7 Disclosures:-

· Accounting policies adopted for revenue recognition.

· Amount of each significant category of revenue recognized during the period.

Treatment of some specific cases in Banking industry:-

Financial Services Fees:

1. Introduction –
• Recognition of revenue for financial services fees depends on the purpose for which the fees are assessed and the basis of accounting for any associated financial instrument.
• The description of fees for financial services may not be indicative of the nature and substance of the services provided.
• Therefore it is necessary to distinguish between fees which are –

i. An integral part of the effective yield of a financial instrument:

1. Such fees are generally treated as an adjustment to the effective yield.
2. However when the financial instruments to be measured at fair vale subsequent to its initial recognition the fees are recognized as revenue when the instrument is initially recognized.

ii. Earned as services are provided:

a. Fees charged for servicing a loan – recognize as revenue as the services are provided.

b. Commitment fees to originate or purchase a loan – recognize as revenue on a time proportion basis over the commitment period.

iii. Earned on execution of a significant act.

a. Commission of allotment of shares to a client – recognize as revenue when the shares have been allotted.

b. Placement fees for arranging a loan between a borrower and an investor should be recognized as revenue when the loan has been arranged.