8/14/2014

Introduction
Learning objective
Define revenue
Understand how to measure revenue
Understand when to recognize
revenue
Understand the disclosure
requirements for revenue

Definition of Revenue
Introduction
Accrual accounting is based
on matching of costs with
revenue .It is important to
establish a point at which
revenue
and cost are is
recognized

IAS 18 define revenue as the gross

inflow of economic benefits
during the period arising in the
course of ordinary activities of an
entity

Definition of Revenue

Measurement of Revenue

Revenue applies to the following

Measurement refers to the amount

of revenue to be recognized or
recorded in the financial records

1. Supply of goods on cash or credit

2. Provision of service on cash or credit
3. Rent received or receivable from

equipment or property hire

4. Interest or dividends receive or
receivable on trade investment

Revenue is measured as the Fair

Value of the consideration received
or receivable less trade discounts
and Volume rebates

8/14/2014

Revenue recognition

Revenue recognition

Recognition refers to the

time when transaction are
recorded in the financial
statements

To be recognized revenue must be;

1. Earned - activities undertaken to
create
the revenue
must be
substantially complete
2. Realized - an event has occurred
which significantly increase the
likelihood of conversion into cash .
Mostly it the date of sale

Critical event in revenue

recognition

Critical event in revenue

recognition

The 'critical event' is the point in the

earnings process or operating cycle at
which the transaction is deemed to
have been sufficiently completed to
allow the profit arising from the
transaction, or a distinct component
part of it, to be recognised as income
in a particular period.

Revenue recognition at the

point of sale and delivery
This is the general rule as to
when revenue recognized
At this stage revenue is earned
and realized

The following will be considered

1. Revenue recognition at the time of
sale and delivery
2. Revenue recognition before delivery
3. Revenue recognition after delivery
4. Other Revenue recognition
situations

Question 1
On 1 September 15 2012 a company received total

subscriptions in advance of K1,728,000 for 12 months

publications of a magazine. At the year end, the
company had produced and dispatched three months
of the 12 month publications. The total cost of
producing one issue of the magazine is estimated at
K120, 000
Required.
Using the traditional approach to revenue
recognition, how should the company treat the
subscriptions in the accounts for the year ended 31
December 2012?

8/14/2014

Recognition of revenue: sale of

goods

Solution

IAS 18 requires the following condition be

Only the revenue for 3 months has been earned 3/12 X

1,728,000=K432,000
9 months revenue is un earned it will be carried as a
liability of deferred income in the statement of
financial position
9/12 X 1,728,000=K1,296,000
Dr revenue K1,296,000
Cr deferred income 1,296,000

met

1. Seller has transferred significant risks and

rewards of ownership to buyer .

2. Seller does not retain continuing managerial

involvement and control over goods sold.

3. Amount of revenue can be measured reliably

4. Probable that economic benefit will flow to

seller

5. Costs incurred or to be incurred can be

measured reliably
Point 3 and 5 underscores the matching concept
for revenue to be recognized

Recognition of revenue: sale of

goods with after sales serving
Where

the sale of product includes

identifiable amount of after sales serving ,the
amount for service is deferred and recognized
as revenue over the period during which the
service is performed .
The amount deferred must cover the cost of
service with the reasonable profit on those
services
The same rule applies to service ,interest
,royalties and dividend revenue

Solution
The K700,000 includes after sales service of 1 year
which is not earned
The cost is K100,000 + the profit of 15 %
100,000+(100,000 x 15%)=115,000
115,000 is deferred
585,000 is recognized as revenue

Question 2
A
computerized
accountancy
package is sold with one year's after
sales support. The cost of providing
support to one customer for one
year is calculated to be K100, 000.
The company has a mark-up on cost
of 15%. The product is sold for K700,
000. How should this sale be
accounted for?

Recognition of revenue from

service
According to stage of completion at reporting date.
All the following conditions should be met
1. The amount of revenue can be measured reliably
2. It is probable that the economic benefits associated

with the transaction will flow to the entity

The stage of completion of the transaction at the
reporting date can be measured reliably
4. The costs incurred for the transaction and the costs
to complete the transaction can be measured
reliably
If the above are not met recognize revenue to the
extent of expenses recognized that are recoverable
3.

8/14/2014

Question 3

Solution

On 1 July 20X3, Company A signs a contract with

customer under which Company A delivers an offthe-shelf IT system on that date and then
provides support services for the next three years.
The contract price is K3,700,000.The cost of the
support services is estimated at K300, 000 pa and
Company A normally makes a profit margin of
25% on such work. Company A makes up financial
statements to 31 December each year.
Required
What revenue should be recognized in the
financial statements for the year ended 31
December 2003?

Note margin means sales is 100%

Markup means sales is 100%+ profit %

Cost of service pa is K300,000.
Since A adds margin of 25%,it means cost is 75% 100%--

--X(sales)
75%------300,000
Sales x=400,000 service revenue pa
Total service is revenue is K1,200,000(400,000x3) only
half(K200,000)isearned from July to December
Revenue to be recognize is K2,500,000 for
product(3,700-1200) and 200,000 for service
Total of K2,700,000

Sale or return

Question 4

Revenue must only be

recognized once the return
period has elapsed

TITA Ltd has included K800, 000 of revenue in its

statement of profit or loss for sales made on a sale
or return basis. At 31 December 20X8, customers
who had not yet paid for the goods had the right
to return K400, 000 of them. TITA applied a
mark-up of 25% on all these sales. In the past
TITAs customers have sometimes returned goods
under this type of agreement.
Required:
How should the sales be recorded in the financial
statement for the year ended 31 December 20X8?.

Solution
From the total sales value only
K400,000 should be recorded in
revenue for the year to 31 December.
The remaining K400,000 is for
goods that are still being held under
a sale or return agreement and
therefore cannot be recognized in
the financial statements.

Solution
Adjustment needed
1.
Remove revenue under return agreement
Dr. Revenue
400,000
Cr. Receivables (SFP)
400,000
2.

Bring the goods back into inventory

Dr. Closing inventory(SFP)
Cr Cost of sales

320,000
320,000

(400,000/125 x 100)

8/14/2014

Agency sales

Question 4b

When acting as an agent only the

commission earned can be recorded as

revenue by the agent.
The principal is responsible for
recording the actual sales revenue in its
own financial statements.

GBMs revenue includes K4 million for goods it sold

acting as an agent for ECZ. GBM earned a commission
of 20% on these sales and remitted the difference of
K3.2 million (included in cost of sales) to ECZ.
Required:
How should the agency sale be treated in GBMs income
statement ?

Solution

Recognition of revenue from

Interest ,Royalties and Dividends

GBM should not have included K4 million in its

revenue as it is acting as the agent and not the
principal. Only the commission element of K800,
000 (4 million x 20%) can be recorded in revenue.
The following adjustment is therefore required

Dr. Revenue

K3,200,000

Cr. Cost of sales K3,200,000

Recognition of revenue from

Interest ,Royalties and Dividends
The following bases are used to recognize

revenue for interest ,royalties and dividend

1. Interest -on a time proportion basis that
takes into account the effective yield on
the asset
2. Royalties - on an accruals basis in
accordance with the substance of the
relevant agreement
3. Dividends - when the shareholder's right
to receive payment is established

Recognize revenue when:

1. It is probable that the
economic benefits associated
with the transaction will flow
to the entity; and
2. The amount of the revenue can
be measured reliably

Disclosure
The following items should be
disclosed.
1. The accounting policies adopted
for the recognition of revenue,
including the methods used to
determine the stage of completion
of transactions involving the
rendering of services

8/14/2014

Disclosure
2. The amount of each significant category of

revenue recognized during the period

including revenue arising from:
(i) The sale of goods
(ii) The rendering of services
(iii) Interest
(iv) Royalties
(v) Dividends
3 The amount of revenue arising from exchanges
of goods or services included in each
significant category of revenue

Revenue recognition before

delivery
Applies when a customer provides a
valid promise of payment ,
Condition exist that contractually
guarantee subsequent sale.
Accounting for this is discussed
under IAS 11 construction contracts

Revenue recognition after

delivery

Revenue recognition after

delivery

Applies if the collection of sales

is not reasonably assured and
revenue recognition is deferred.

2 methods are used to deferrer

revenue .
The installment method were
revenue is recognized when the
cash installment is received.
Cost recovery method revenue only
recognized when cash payments
exceeds the cost of sales

Expense recognition

Expense recognition

An expense is decreases in economic

benefits during the accounting period
in the form of outflows or depletions of
assets or incurrence of liabilities

Can be divided in to 3 categories

1. Direct matching
2. Systematic and rational
allocation
3. Immediate recognition

8/14/2014

Direct matching

Systematic and rational

allocation

This is where expenses are related

to specific revenues.

This involves assets that benefit more

Expenses include those related to

revenue although not incurred.
Recognition is done immediately
when related revenue is recognized

across the periods of expected benefit

in some systematic way.
It is difficult to relate these expenses
directly to revenue but are necessary if
revenue is to be earned
E.g. Depreciation & amortization

than one accounting period .

The cost of Non current assets are spread

Immediate recognition

Immediate recognition

Applies to expenses that are not

related to specific revenue but are
incurred to obtain goods and
services that indirectly help to
generate revenue.eg utilities
Since these are used immediately
they are recognized in the period of
acquisition

It is also applicable when future

benefits are highly uncertain e.g.
research and development
Most
loses
are
recognized
immediately e.g. loss from natural
disaster ,loss from disposal of
assets