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International Accounting Standard 18 Revenue International Accounting Standard 18 Revenue

International Accounting Standard 18 Revenue - PowerPoint Presentation

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International Accounting Standard 18 Revenue - PPT 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: 499795

transaction revenue cash 000 revenue transaction 000 cash amount interest entity measured recognition economic reliably int receivable benefits ias consideration sale 652

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Slide1

International Accounting Standard 18 Revenue

Ahmad IsmailSlide2

What is IAS 18 Revenue?Measurement of revenueRecognition of revenueIdentification of transactionContentSlide3

Income definition per framework :Increases economic benefits assets / liabilities

= equity ( other than contribution )

.Slide4

Income includes Revenue & Gains

Revenue

– ordinary activity of business

Gains

– not ordinary , profit on sale

.Slide5

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? Definition Slide6

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.

Example:Slide7

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

values

Agent/principal relationship

Amounts collected on behalf of principal are not revenue Revenue = commission

Measurement issues Slide9

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

Recognition CriteriaSlide10

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.

Revenue recognitionSlide11

During productionAt completion of productionTime of saleOver period receivables outstandingAt the time cash is collectedRevenue 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

Example continuedSlide14

1,652,893

Account receivable

1 Jan 01

1,652,893

Revenue

165,289

Account receivable

31 Dec 01

165,289

Interest revenue

181,818

Account receivable

31 Dec 02

181,818

Interest revenue

2,000,000

Cash

31 Dec 02

2,000,000

Account receivable

Example continuedSlide15

IAS 18 specifies revenue recognition criteria for 3 basic revenue generating scenarios:Sale of goodsRendering of services

Interest, 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 Transaction Slide17

For example:..

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.

T

he 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 salesTransfer 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 services Slide22

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 parties

the consideration to be exchanged

the 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.

ConsiderationSlide24

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 Receivable

Interest at 5% x Receivable

Year

100,000

Debit Bond, Credit Int. Revenue

105,000

5,000

1

110,250

5,250

2

115,763

5,513

3

121,551

5,788

4

127,629

6,078

5

134,010

6,381

6

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)

int = 5%Slide27

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.Conclusion: Current development of Standard IAS 18