to IAS 18, during the time period arising in the course of normal activities of an entity, all the gross inflow of the economic benefits is revenue, and there should be an increase in equity with the help of those inflows, these inflows also result in contributing in equity participants (Tysiac, 2013).

We recognize a revenue when there is a chance of getting the future benefits by the entity and the organization can reliably measure these revenues. In IAS 18, there is an identification of the circumstances in which these criterias will be met.

The agreement between the entity and the buyer or the user of the asset determine the amount of revenue that will arise on a transaction  (Emerald, 2013)

The revenue that is coming from the following transactions, this standard shall be used:

1. The selling of goods
2. Providing the services
3. The use of assets of entity by others that results in generating interest, royalities and dividends

For each and every transaction, the implication of this standard is different. When two or more transactions are different but there is a relation between these transactions then the recognition criteria is applied to all of them.

Fair value of a consideration should be used for the recognition of revenue. Fair value is the price of a product by which an asset can be exchanged between two parties.

As suggested by Opperman (2009) following are the implications that are drawn from the definition:

1. Before deducting the costs of sales, revenue should be stated. For example if the company sold the goods for $100 and the cost that was incurred to manufacture is $60, then the revenue will be $100, it was not taken as $40 that is after deducting the cost.
2.  All that activities that are related to the ordinary activities are recognized for revenue. All the proceeds of disposal of any disposed plant and equipment, property at the end of useful life are not the revenue. The profit and loss that is incurred on disposal of those assets are deducted from operating expenses.
3. Sales taxes that the customers pay and that are remitted to the related authorities are not the part of revenue. For example, If the goods are sold to the customers for $110 and 10% is the amount of tax that is collected from them then the revenue will only be $100. 
4. If the seller is not the principal, he is only the agent of a company or agent of the seller, and then the revenue for him will only be the amount of commission that he will collect not the full amount that is collected by customer. For example, if the agent gave the product of $100 to the customer and collected $110 including commission, then the revenue will only be $10 not $11.   
5. There is a boutique in which the sale of the exclusive garment is done with the condition that it can be returned within one week of selling. In this case, the boutique owner can recognize the revenue after one week of the sale of the item.

IAS 11

Construction contracts: In IAS 18; there was no addressing of issue of recognition of revenue on a construction contract. However, basic principles that we already identified to the contracts are applied by IAS 11 are as follows (Opperman, 2009).

‘Contracts are negotiated to construct an asset or assets that are interlinked or independent with respect to their design, technology and function or their objective or use’. Most of the construction contracts are ‘fixed price contracts’. In these contracts, a fixed contract price is agreed by the seller, or a constant rate per unit of output, which in some cases related to change in cost clauses (IAS 19 Revised , 2004).

While the supply of goods is related to construction contract, to determine the timing of recognition of revenue earned on supplying the goods is not really suitable, the ‘critical event basis’ used in IAS 18. The reason is that the ‘supply’ done by the seller in case of contract of construction takes place slowly over the term of contract. So, there is a need that where the productivity of construction contract can be recognized reliably, on such contracts the revenue should be recognized according to the time of completion of contract.  According to IAS 11, the conditions are imposed that are very similar to the conditions that are included in IAS 18 for the provision of services that are needed to be satisfied before the recognition of the outcome of a construction contract (Ammendmend to IAS 19, 2004).

1. The revenue of total contract can be measured reliably.
2. There is a probability that the economic benefits that are linked with the contract will move to the seller.
3. Both the cost of seller in order to complete the contract and at the end of reporting period the stage of contract completion can be measured reliably.
4. The cost of seller to the date of attribute to the contract can be identified clearly and measured reliably so that the actual costs and prior estimates can be compared with each other.

One single method for computing the stage of completing the construction contract is not prescribed in the case with service revenue recognition in IAS 18, IAS 11.
Following examples of procedures are provided in IAS 11 that might be suitable (Terrell, 2012).

1. The amount of contract costs that is incurred for the work that is performed to date bear to total predicted cost of contract
2. The study of work performed
3. Physical proportion of the work of contract that is to be completed

The statement related to treatment of revenue from the rendering of services in IAS 18 & IAS 11 is:

Revenue shall be recognized only to the extent of contract costs that are incurred, when the outcome of construction contract cannot be estimated. In short, in IAS 11 there are all the principles mentioned in IAS 18 for the recognizing of revenue from construction contracts (Criteria for entry, 2013)

 

 

 

1.1.Principles underpinning recognition of revenue

As stated by Christian & Lüdenbach (2013) the recognition principles of revenue are divided into three parts in IAS 18:

1.1.1.Sale of goods

When all the following conditions will be satisfied then revenue will be recognized:
(a) All the risks and rewards of ownership of products has been transferred by the seller to the buyer.

 (b) The seller does not retain control over the goods or managerial involvement with them to the degree usually associated with ownership.
(c) The amount of revenue can be measured reliably.
(d) It is probable that the economic benefits associated with the transaction will flow to the seller
(e) the costs incurred or to be incurred by the seller in respect of the transaction can be measured reliably.

1.1.2.Provision of services:

When all the following conditions will be satisfied then the outcome will be measured reliably:

1. There is a probabilty that economic benefits will be given to the buyer after the sale.
2. The reliable measurement of amount of revenue can be done
3. At the end of the reporting period, the stage of completion can be measured reliably
4. The total cost that is incurred during transaction can be measured reliably.

Interest, royalties and dividends:
According to IAS 18, revenues should be recognized by the entities from using of assets for earning interest, royalties and dividends when (11):

1. There is a probability of flowing of economic benefits that are associated with the transaction to the entity.
2.  Revenue can be measured reliably.
3.  When the right of shareholder to receive payment is established then dividends shall be recognized.
4. With the help of effective interest method, interest should be recognized.
5. According to the substance of relevant agreement, royalties shall be recognized on accrual basis.

Following points are notable:

• Conditions (a) and (b) are related to interpretation so, there is no surety that whether we can recognize that revenue or not.
• All the conditions are like that they can be satisfied at a specific point and so there is a difficult point where all the revenue would be recognized that is earned by the sale of goods. This approach is different to the approach that is taken to the revenue recognition from the services provision.

As described above, from the provision of services there are various approaches that is taken for recognizing the revenue. According to IAS 18, associated revenue should be recognized with reference to the time of completion of the transaction where the productivity of the transaction along with the rendering of services can be estimated completely in the last of the reporting period.  We can also say that, we slowly recognize the revenue, rather can recognizing at a single point in time. It is also stated that when all the following conditions are satisfied then we can easily estimate the outcome of a transaction (Burgard, 2008).

(a) We can measure the amount of revenue reliably.

(b)There is a probability that the economic benefits that are linked with the transaction will move to the seller.
(c) The time of completing the transaction at the last of the reporting period can be measured correctly.
(d) Both the costs; incurred at the date when transaction was made and the costs incurred at the completion can be measured reliably.

IAS 18 does not describe one single method that should be used to determine the stage of completing the service transaction. However, some examples of proper methods are also provided by the standard (Needles, 2013).

(a) Examination of work performed.
(b) Services that are performed to date as a percentage of whole service to be performed.
Revenue should be recognized to the extent of costs that are incurred by the seller, if it is impossible to measure the outcome of transaction correctly that are involved in the provision of services, by assuming that we can recover these costs from the buyer (IAS 19 Revised , 2002).
 

1.2.Principles underpinning measurement of revenue

According to IAS 18, the measurement of revenue shall be done at the fair value of the consideration that is received or receivable. Any trade discounts or volume rebates granted by the seller should be taken for the determination of fair value.

Mostly, the cash or cash equivalents received or receivable by the seller are the ‘fair value’. However, when there is deferred consideration, then IAS 18 explains that there is financing transaction and the substance of transaction is supply of goods or services along with the provision of finance in the arrangement (Meriam-Webster, 2013)

In these situations, the amount receivable is divided into:

(a) The amount that is to be received for supplying the goods. This is calculated when the future cash which is receivable by the seller is discounted.

(b) The amount that is receivable for the supply of finance to the buyer.

1.2.1.Example

A retail entity supplies products to the public on three year deferred payment terms. On 1 January 2013 the entity supplies a product for a total price of $13,310, payable on 1 January 2016. The credit rating of the customer is such that a relevant imputed annual rate of interest is 10%. The entity’s year end is 31 December.
On 1 January 2013 the total revenue from the sale would be split into:

1. Revenue from the sale of goods of $10,000 ($13,310/(1.10) (3). This is recognised immediately by crediting revenue and debiting receivables.
2. Interest revenue of $3,310 ($13,310 - $10,000). This is recognised over the three years as shown in the table below:

Year ended 31 December $	Opening receivable $	Finance income (10%) $	Closing receivable $
2013	10,000	1,000	11,000
2014	11,000	1,100	12,100
2015	12,100	1,210	13,310

On 1 January 2016, the cash is received and the receivable derecognized.

Similar principles are used for the measurement of revenue by IAS 11 from construction contracts.

1.3.IAS 18 implementation example

As mentioned earlier, these examples are not the part of IAS 18. But, they are useful for the application and have worth in reviewing. It was assumed that the revenue and costs can be measured and it was also assumed that all the economic benefits will be flown to the seller. 

1.3.1.Example – sale and repurchase agreements

Where products are sold to the buyer under the condition that either there is a requirement of seller to repurchase them in future or there are choices to repurchase that can be exercised then the sale is actually the provision of finance.

An example stated by Mirza et al. (2010) is that suppose entity A ‘sells’ goods to entity B on 1 January 2013 for $400,000. The goods are inventories that need to mature for five years before being ready for sale.  Their market value on 1 January 2013 was $800,000 and entity A has the option to repurchase the goods from entity B on 1 January 2018 for $600,000. The market value of the goods is expected to rise by 5% per annum from 2013 to 2017 inclusive. Entity A’s credit rating is such that it would have to pay interest at 8.447% per annum on borrowings.  The goods are expected to remain at the premises of entity A throughout the five year period beginning on 1 January 2013 and entity A is responsible for their safe custody.
In the above example, there are at least two conditions that are required for recognizing the revenue on the sale of goods that are not satisfied:

• Entity A did not transfer the rewards of ownership to B, despite the fact that ownership should be transferred to B.
• Entity A did not transfer the managerial involvement to B, that should be associated with the ownership
  so, the entity A should recognize the revenue when the goods are sold in 1 January, 2013.
• Over the next five years the borrowing will grow as follows:

Year ended 31 December $	Opening borrowing $	Finance cost (8.447%) $	Closing borrowing $
2013	400,000	33,788	433,788
2014	433,788	36,642	470,430
2015	470,430	39,737	510,167
2016	510,167	43,094	553,261
2017	553,261	46,739	600,000

The almost certain ‘re-purchase’ on 1 January 2013 will eliminate the borrowing.
 

1.4.Changes that are likely to the method accounting for revenue in the future

1.4.1.Background

As it is already stated, for the assessment of financial performance and position of an entity revenue is a difficult number to the users of financial statements. However, the accounting principles used by GAAP are different from used in IFRSs.

As said by Opperman (2009) there is a need of improvement in both the sets. There are different broad revenue recognition concepts and small requirements for specific industries in US GAAP. 
There are also mentioned transactions that can form different accounting for the transactions that are economically different. Although, there is a need of some requirements on recognizing the revenue in IFRSs, It can be difficult to understand IAS 18, Revenue, IAS 11, and Construction Contract. In addition, there is very less assistance on important topics like revenue recognition for more than two element arrangements (Institute, 2013).

1.4.2.Detail

As suggested by Epstein & Jermakowicz (2010) In order to clarify the principles for recognizing the revenue and for the development of a common revenue standard, the international accounting standards board (IASB) and US national standard setter, FASB started a joint project that would be:
Remove the negative points from resisting revenue requirements.

1. Provide a more concise and efficient framework for solving revenue issues
2. Improve the comparability of recognizing practices of revenue across different entities, industries and capital markets.   
3. With the help of improved disclosure requirement, provide more information that is useful to users for financial statement.
4. Provide simple method of preparing the financial statements by decreasing the number of requirements.
   From the IFRS concepts, the new standard from the projects is better than the existing standard. This should help in future convergence between IFRS and US GAAP.
    

 

 

 

 

References

1. Ammendmend to IAS 19. 2004. IASB.

 

2. Burgard, W. 2008. IAS-10. UK: IOS press.

 

3. Epstein, B. J., & Jermakowicz, E.K. 2010. WILEY Interpretation and Application of International Financial Reporting Standards. New Jersey: John Willey & Sons.

 

4. Christian, D., &  Lüdenbach, N. 2013. IFRS Essentials, UK: John Willey & Sons.
5. IAS 19 Revised . 2002. IASB. Official journal of Europeon union.
6. IAS 19 Revised . 2004. IASB.
7. Institute, J. 2013. IAS prelims magic 2013. New Delhi: JTS institute.

 

8. Mirza, A.A., Holt., L. & Knorr, L., 2010.  Wiley IFRS: Practical Implementation Guide and Workbook, New Jersey: John Willey & Sons.

 

9. Needles, B. E.,  2013. Principles of financial accounting. New York: Cengage learning.
10. Opperman, 2009. Accounting Standards, 13^th edition, Lansdowne: Juta & Co.
11. Terrell, E. 2012. Accounting and Auditing . Library of Congress.
12. Tysiac, K. 2013. New mechanisms eyed by FASB, IASB in long march toward global comparability. Journal of Accountancy, 11(5), pp. 76-98