International Accounting Standard 18 Revenue PowerPoint Presentation
Ahmad Ismail. What is IAS 18 . Revenue?. Measurement of revenue. Recognition of revenue. Identification of transaction. Content. Income definition per framework :. Increases economic benefits. assets / liabilities. ID: 499795Embed code:
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International Accounting Standard 18 Revenue
What is IAS 18 Revenue?Measurement of revenueRecognition of revenueIdentification of transaction
Income definition per framework :Increases economic benefits assets / liabilities= equity ( other than contribution )
Income includes Revenue & Gains Revenue – ordinary activity of businessGains – not ordinary , profit on sale
Gross inflow economic benefit (cash, receivables, other assets)During the period Ordinary activity other than increases relating to contributions from equity participants.
What is Revenue? DefinitionSlide6
Chain of 10 bicycle shops sells new and used bicycles and rents bicycles. This year it sold the land and building for one of its shops, which was closed.It has 3 types of revenue: Sale of new bikes, Sale of used bikes, and Rentals. The proceeds from selling the land and building are not revenue (not ‘ordinary’); instead, this is presented net as a gain or loss.
Revenue is usually determined by agreement between the entity and the buyer or user of the asset.Revenue is measured at the fair value taking into account the amount of any trade discounts and volume rebates allowed by the entity.Fair value is the amount for which an asset could be exchanged between willing parties in a transaction.
Measurement of revenueSlide8
Fair value of consideration Delayed payment (deferral, discounting, collection risk)Exchanges/barter transactions Similar items - no revenue Otherwise dissimilar - fair valuesAgent/principal relationship Amounts collected on behalf of principal are not revenue Revenue = commission
The entity has substantially performed what is required in order to earn incomeThe amount of income can be reliably measured The related assets received can readily be converted to cash or claims for cash
Revenues are recognized to the extent that it is probable that economic benefits will flow to the entity and the amount of revenue can be measured reliably. Revenues are stated net of discounts, allowances and returns.
During productionAt completion of productionTime of saleOver period receivables outstandingAt the time cash is collected
Revenue Recognition OptionsSlide12
We sell goods costing 1,500,000 for 2,000,000 due in 2 years interest free. Current cash price would have been 1,652,893. Financing transaction. Up front revenue is 1,652,893. Profit is 152,893. PV = (FV) / ((1+int)^periods)1,652,893 = (2,000,000) / ((1+int)^2)Int = 10 (10%) by solving the equation
Example: deferred paymentSlide13
Example, continued:Interest income year 1 = 1,652,893 x 10% = 165,289, unpaid, bringing receivable up to 1,818,182.Interest income year 2 = 1,818,182 x 10% = 181,818, bringing receivable up to 2,000,000, which is then repaid
1,652,893Account receivable1 Jan 011,652,893 Revenue165,289Account receivable31 Dec 01165,289 Interest revenue181,818Account receivable31 Dec 02181,818 Interest revenue2,000,000 Cash31 Dec 022,000,000 Account receivable
IAS 18 specifies revenue recognition criteria for 3 basic revenue generating scenarios:Sale of goodsRendering of servicesInterest, Royalties and Dividends
Recognition of revenueSlide16
The recognition criteria are usually applied separately to each transaction. In certain circumstances, it is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction.
Identification of the TransactionSlide17
When the selling price of a product includes amount for subsequent servicing, that amount is deferred and recognized as revenue over the period during which the service is performed.
The recognition criteria are applied to two or more transactions together when they are linked in such a way that the commercial effect cannot be understood without reference to the series of transactions as a whole.Slide18
Revenue should only be recognized when all of the following conditions are satisfied :transferred the significant risks and rewards of ownership of the goods to the buyerThe seller no longer has management involvement or effective control over the goods The amount of revenue can be measured reliably, It is probable that the economic benefits associated with the transaction will flow to the entity The costs incurred in respect of the transaction can be measured reliably
Sale of goodsSlide19
Examine the circumstances of the individual transaction. In most cases, the transfer of the risks and rewards of ownership coincides with the transfer of the legal title or the passing of possession to the buyer. Common for most retail sales
Transfer of risks and rewardsSlide20
The outcome of a transaction can be measured reliably when all of the following conditions are met: The amount of revenue can be measured reliably; It is probable that economic benefits associated with the transaction will flow to the entity;The stage of completion of the transaction at the end of the reporting period can be measured reliably; The costs incurred for the transaction and the costs to complete the transaction can be measured reliably.
Rendering of servicesSlide21
Example: Security firm receives 10,000 to respond to alarms for 2-year periodService contract stage of completion is even over two years. 10,000 / 24 = 417 revenue recognized per month.
Example rendering of servicesSlide22
Revenue is recognized only when the economic benefits associated with the transaction will flow to the entity. Reliable estimates after it has agreed to the following with the other parties to the transaction: each party’s enforceable rights regarding the service to be provided and received by the partiesthe consideration to be exchangedthe manner and terms of settlement.
Probable economic benefitsSlide23
In most cases, the consideration is in the form of cash or cash equivalents and the amount of revenue is the amount of cash or cash equivalents received or receivable. However, when the inflow of cash or cash equivalents is deferred, the fair value of the consideration may be less than the nominal amount of cash received or receivable. For example, an entity may provide interest-free credit to the buyer or accept a note receivable bearing a below-market interest rate from the buyer as consideration for the sale of goods.
Amounts collected on behalf of third partiessuch as sales taxes, goods and services taxes and value added taxes They are not economic benefits which flow to the entity and do not result in increases in equity.
Excluded from revenueSlide25
Interest revenue should be recognised on the effective interest’ basis. Dividend when the right to receive payment is established. Often this does not happen in the case of dividends until the shareholder actually receives the dividend.Royalties should be recognised on an accruals basis in accordance with amounts receivable as a result of ‘asset use’ up to the reporting date.
Interest, royalties and dividendsSlide26
Bond ReceivableInterest at 5% x ReceivableYear100,000Debit Bond, Credit Int. Revenue105,0005,0001110,2505,2502115,7635,5133121,5515,7884127,6296,0785134,0106,3816
Example: interest revenue
Example: We buy zero coupon bond for 100,000, redeemable at 134,010 in 6 years.
PV = (FV) / ((1+int)^periods)
100,000 = (134,010) / ((1+int)^6)
Standard IAS 18 undergoes major revision as a part of the convergence project between IASB (setter of IFRS) and FASB (setter of US GAAP).The new IAS 18 is expected to be applicable from 1 January 2017 or later. So the current IAS 18 in the financial statements will stay in force till 1 January 2017.
of Standard IAS 18Slide28Slide29