Revenue Recognition - Under IFRS

As per IFRS Revenue is subset of Income and is defined in IAS 18

“… 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”

Revenue includes only economic benefits arising in the ordinary course of an

entity’s activities, whereas income include such benefits that arise from all

activities whether ordinary or otherwise

Revenue should be recorded based on the substance, not the form, of a transaction.

The substance will not only be based on the transaction’s visible economic effects; it

will also have to be analysed based on all the transactions' contractual terms, or the

combination of the contractual terms of linked transactions.

Revenue excludes revaluation gain as well as contribution from equity

participation and income from non-ordinary activities.

Timing of Revenue Recognition

IAS-18 distinguishes between revenue from sale of goods, revenue from the

rendering of services and revenue from the use by others of the entity’s assets. But

the principal beside all the categories are same

Sale of Goods:- Revenue arising from the sale of goods should be recognized

when all of the following criteria have been satisfied:

• the seller has transferred to the buyer the significant risks & rewards of

ownership;

• the seller retains neither continuing managerial involvement to the degree

usually associated with ownership nor effective control over the goods sold;

• the amount of revenue can be measured reliably;

• 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.

Rendering of Services :- For a transactions involving the rendering of services

when the outcome of the transaction can be estimated reliable, revenue should be

recognised by reference to the transaction’s stage of completion at the balance sheet

date.

The transaction’s outcome can be estimated reliably when all the following conditions

are satisfied

• the amount of revenue can be measured reliably;

• it is probable that the economic benefits will flow to the seller;

• the stage of completion at the balance sheet date can be measured reliably;

• the costs incurred, or to be incurred, in respect of the transaction can be measured

reliably.

When the above criteria are not met, revenue arising from the rendering of

services should be recognised only to the extent of the expenses recognised that are

recoverable (a "cost-recovery approach". )

Revenue from the use by others of the entity’s assets:- Revenue

arising from the use by others of the entity’s assets yielding interest, royalties and

dividends should be recognised when:

• Its probable that the economic benefits associated with the transaction will flow to

the entity

• The amount of the revenue can be measured reliably

The standard clearly states that when the expenses cannot be measured reliably,

revenue cannot be recognised and any consideration received should be

recognised as a liability.

One of the condition for revenue recognition is that it is probable that the economic

benefits relation to the transactions will flow to the entity. In some situation, it may not

be probably that the economic benefits will flow to the entity until the consideration is

received by the entity or until an uncertainty is removed. In this situation we can’t

recognised the revenue until consideration is received of uncertainty is removed.

Where uncertainty arises about the collectibility of an amount that has already

been included in revenue, any provision required as result of that uncertainty is

recognised as an expenses and not as a reduction of revenue.

Revenue from the use by others of the entity’s assets:- Revenue

arising from the use by others of the entity’s assets yielding interest, royalties and

dividends should be recognised when:

• Its probable that the economic benefits associated with the transaction will flow to

the entity

• The amount of the revenue can be measured reliably

Measurement of Revenue

The principle set out in IAS 18 is that revenue should be measured at the fair

value of the consideration received or receivable.

Where goods are sold or services provided in return for consideration in the form of

cash or cash equivalents receivable at the time of the transaction or shortly thereafter,

the fair value is generally the amount receivable.

However, even then the following factors still require consideration in determining the

revenue to be recognised:

• If principal/agency relationship exists and entity is acting as an agent , Revenue

should be recognised to the extent that it represents payment for acting as an agent.

• The existence of trade discounts, volume rebates and other incentives which

should be taken into account in measuring the fair value of the consideration received

• If transaction forms part of a multiple element transaction, the total consideration

should be allocated to each separable element of the transaction.

Measurement of Revenue

If payment is deferred, the substance of the arrangement is that there is both a sale

and a financing transaction. In this case, its necessary to discount the consideration

to present value in order to arrive at fair value. IAS-18 requires that the rate of

discount should be whichever of the following is more clearly determinable

• the prevailing rate for a similar instrument of an issuer with a similar credit ratin or

• a rate of interest that discounts the nominal amount of the instrument to the

current cash sales price of the goods or service

Example:- An entity sells good on extended credit. The goods are sold for $1,200

ON 1ST Jan 2007, receivable on 31st Dec 2008. The customer can borrow at 4.5%

On transaction date, Revenue of $1,099 will be recorded.

The discounted receivable should be updated at each balance sheet date to reflect

the passage of time. The resulting increase in the receivable represents interest

income and should be recognised from the date of sale to receipt of cash.

Please discuss on IFRS, if i will get good discussion, i would like to share revenue recognition under different scenerio. Only if i get a good response.

Please dont mind " But ek hath se tali nahi bajti"

Thanks

Amit

Hi Amit,

Please explain how IFRS recognise revenue for exchange of services?

Suppose, vodafone operates in chennai circle and Airtel operates in Hyderabad circle for a moment assume that vodafone and Airtel does not have license to operate in Hyderabad and Chennai respectively. Now Chennai based vodafone subscriber goes to Hyderabad, no doubt that he will be charged for roaming. For the above transaction, How revenue should be recognised by Vodafone and Airtel in IFRS?

Hi Amit,

I have one more question, whats the difference between

1) transfer of significant risk and rewards

2) the seller retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold.

why is it necessary to have above two condition when we have first condition?

Originally posted by : CA. Amit Daga
	Measurement of Revenue If payment is deferred, the substance of the arrangement is that there is both a sale and a financing transaction. In this case, its necessary to discount the consideration to present value in order to arrive at fair value. IAS-18 requires that the rate of discount should be whichever of the following is more clearly determinable • the prevailing rate for a similar instrument of an issuer with a similar credit ratin or • a rate of interest that discounts the nominal amount of the instrument to the current cash sales price of the goods or service Example:- An entity sells good on extended credit. The goods are sold for $1,200 ON 1ST Jan 2007, receivable on 31st Dec 2008. The customer can borrow at 4.5% On transaction date, Revenue of $1,099 will be recorded. The discounted receivable should be updated at each balance sheet date to reflect the passage of time. The resulting increase in the receivable represents interest income and should be recognised from the date of sale to receipt of cash.

Hi sir

Can u please explain Measurement of Revenue part a bit more.. i didnt the discount issue..

Dear Satish,

Companies usually trade for cash or the right to receive cash. Sometimes, however, transactions are undertaken that involve the swapping of goods or services. These are known as Barter Transactions.

IAS 18 does not permit revenue to be recognised in an exchange or barter of similar goods or services. Where goods or services are exchanged for goods or services of a dissimilar nature, the revenue is measured at the fair value of the goods or services received. In terms of determining the point at which a sale should be recognised, the accounting for barter transactions is no different from accounting for transactions that are settled in cash.

Example:- A travel agency sells low-price holidays, The agency has entered into an advertising agreement with a radio broadcaster. The agreement provides for the travel agency to place radio advertisement to the value of Rs. 15000 and in return the radio broadcaster advertise on the travel agency’s web page. The travel agency has previously sold similar web-site advertising space to others for cash of Rs.10,000

In this case the travel agency should recognise advertising revenue of Rs.10,000 and advertising expenses, also of Rs.10,000. This is calculated by reference to the value of advertising services provided and not by reference to the value of the value of services received. The medium of the advertisement is dissimilar in nature.

SIC 31 states that the seller can only reliably measure the fair value of advertising services it provides in the exchange by reference to non barter transactions.

Satish,

Sometime after transfering the goods to customer also management hwill retains there managerial involvement to the ownership. Like in case of re-purchase agreement. So it cant be sale. Thatswhy  both the condition need to be satisfied

Srinath,

What is your exact question. Can you tell me.

Here i want to show abt the financial arrangement. if company do they have to discount there revenue

Amit