200536 Intermediate Financial Accounting

Homework Solutions for Tutorial

chapter 05
Comprehension questions
1. What are the key distinctions between income and revenue? Why do you think the
IASB made these distinctions?
The IASB Framework states that income encompasses both revenue and gains. The only
distinguishing feature of revenue is the reference to ordinary activities of an entity. The
distinction is essentially a classification issue within income, to distinguish revenue from an
entitys ordinary activities from its other activities.
Because of this broad definition, income is further dissected into revenue and gains. The
Framework defines revenue as arising in the ordinary activities of an entity, and includes sales,
fees, interest, dividends, royalties and rent.
Gains, on the other hand, are described in the Framework as other items that meet the definitions
of income and may or may not arise in the course of the ordinary activities of an entity. Gains
include, for example, the gain on disposal of non-current assets, and from upward revaluation of
financial assets that are classified as available for sale.
4.

What are the recognition criteria for income under the Framework? How do these differ
from the key stated purpose of AASB 118?

The recognition criteria for income under the framework are:

Income is recognised in the income statement when an increase in future economic benefits
related to an increase in an asset or a decrease of a liability has arisen that can be measured
reliably. This means, in effect, that recognition of income occurs simultaneously with the
recognition of increases in assets or decreases in liabilities.
This means that once an asset is recognised or a liability reduced or derecognised, under the
Frameworks asset/liability model, income is recognised simultaneously.
The key purpose stated in AASB 118 is to identify when revenue should be recognised. AASB 118
(Objective paragraph) states that:
Revenue is recognised when it is probable that future economic benefits will flow to the entity
and these benefits can be measured reliably.
AASB 118 then specifies the circumstances in which the recognition criteria will be met.

5. What is a multiple-element transaction? Give two examples of these and discuss how
AASB 118 applies to such transactions.
A multiple-element transaction is one in which there are separately identifiable components to
each of which the recognition criteria must be applied in order to reflect the substance of the
transaction. The total consideration for the transaction is allocated between the elements.
Examples include: the selling price of a product that includes an amount for subsequent servicing;
and, a telephone service provider who provides a free handset to a customer who subscribes for a
service contract.

IFA 200536

Solutions - chap 05

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