IAS 18 – Revenue UFE Study Guide

Revenue (IFRS)
Last Updated: October 1, 2012

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Revenue is covered under

  • IFRS – IAS 18 (Revenue); and
  • ASPE – Section 3400 (Revenue)

Determine first whether the entity is a public entity required to use IFRS or private entity opting to use IFRS. Private entities opting to use ASPE should use the ASPE guidance. This standard covers the sale of goods and the rendering of services by an entity but does not apply to construction contracts nor extraction of mineral ores.


Under IFRS (IAS 18)

Definition

  • Revenue is the cash coming into the business from its ordinary business activity such as sale of goods or provision of services.
  • Revenue collected on behalf of another party (sales tax for example) is not an economic benefit for the entity and is excluded from Revenue.

 Measurement

  • Revenue is measured at fair value of consideration received or receivable on the date of the transaction. (IFRS 13 covers Fair Value)
  • When similar goods or services are swapped, this is not considered a transaction which generates revenue.
  • In transactions that have deferred receivable amounts and constitute a financing transaction, the time value of money should be considered and all future receipts are discounted using an imputed interest rate.
    • The imputed rate is the more determinable of the prevailing rate of a similar instrument; or
    • an interest rate that discounts the instrument to the current cash price of the good or service.

Identification of the Transaction

Recognition criteria are usually applied to individual transactions but there are many cases when there are separately identifiable components of a single transaction. This is sometimes referred to as multiple-deliverable transactions. When this occurs (use judgment) then the recognition criteria should be applied to each individual component. An example of this is the sale of software where there is also an identifiable amount of separate servicing for a given amount of time.

Sale of Goods

Revenue Recognition Criteria (All must be met):

  • significant risks and rewards have been transferred
    • Consider: performance warranties, consignment sales, installation still required, buyer can rescind the contract and seller is unsure about probability of return. All these might indicate risks remain.
    • Insignificant risks such as return options for unsatisfied customers should still be recognized if an estimate of returns can be made.
  • managerial involvement and control over the good sold has ceased
  • the amount of revenue is measurable
  • it is probably that the economic benefits will flow to the entity
    • When it’s uncertain that you will collect from an entity after revenue is recognized this is treated as a bad debt expense not a reduction in revenue.
  • the entity’s costs relevant to the transaction can be measured reliably, this is the matching principle and may result in deferred revenue liability.

Rendering of Services

Revenue for services is recognized by reference to the stage of completion (percentage of completion method). The following conditions must all be met:

  • the amount of revenue is reliably measurable
  • it is probable that the economic benefits will flow to the entity
    • When it’s uncertain that you will collect from an entity after revenue is recognized this is treated as a bad debt expense not a reduction in revenue.
  • the stage of completion on the reporting period can be measured reliably
    • A variety of ways can be used to measure the stage of completion including surveys of work performed, services performed / total services, or the proportion of costs to-date / total expected costs. Ignore progress payments.
    • When services are performed in an indeterminate amount of acts then usually it’s recognized straight-line over the specified period unless one act is more significant than any other act in which case recognition is postponed until that act is complete.
    • When the outcome of rendering services cannot be reliably measured then revenue shall be recognized only to the extent of the expenses recognized are recoverable. If recoverability of these expenses is not likely than no revenue should be recognized.
  • the entity’s costs relevant to the transaction can be measured reliably

Interest, Royalties and Dividends

Interest, Royalties and Dividends shall be recognized when it’s probable that the economic benefits will flow to the entity and the amount of revenue is measurable.

Revenue is recognized for each as follows:

  • Interest: Effective interest method (IAS 39 and AG5-AG8)
  • Royalties: Accrual basis based on the substance of the agreement
  • Dividends: When the right to receive the payment is established

Please report errors, omissions or suggestions to technical@ufeblog.com

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