International Accounting Standards

IAS 18 Revenue

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Preview

Treatment of revenue arising from:

• the sale of goods,
• the rendering of services, or
• the use by others of enterprise assets yielding
interest royalties and dividends.
Basic principle: all such revenue must be
measured at the fair value of the
consideration received or receivable.

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Objective

To explain the treatment of revenue arising

from certain types of transactions and
events.

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Scope

IAS 18 should be applied in accounting for

revenue arising from the following
transactions and events:
• the sale of goods;
• the rendering of services; and
• the use by others of enterprise assets yielding
interest, royalties and dividends.

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Revenue: Definition and Measurement

Revenue is defined as:

• the gross inflow of economic benefits during
the period
• arising in the course of ordinary activities
• that result in increases in equity,
• other than increases relating to contributions
from equity participants.

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Continued-Revenue: Definition

IAS 33 requires revenue to be measured at the fair

value of the consideration received or receivable,
i.e., net of related taxes (VAT), discounts.
Fair value is defined as the amount for which an
asset could be exchanged, or a liability settled,
between parties in an arm’s length transaction.
Revenue is reported gross but revenue is stated net
of amounts collected on behalf of third parties
such as value added tax.

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Continued-Revenue: Definition…

No revenue is recognized when goods and services

similar in nature and value are exchanged.
In cases where an enterprise is a part of an agency
relationship, the following rules apply:
• amounts collected on behalf of and passed on to the
seller are not revenue of the agent;
• the principal in an agency relationship recognizes as
revenue the gross amount charged to the customer.
Commission paid is accounted for as an expense.

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Continued-Revenue: Definition…

Generally, the measurement of revenue is

not an issue. However, problems in
measuring revenue arise when there are:
• Deferred payment terms (see IAS 18.11 for
guidance);
• Transactions which combine the sale of goods
with a separately identifiable service (see IAS
18.13 for guidance); and
• Non-cash transactions, such as barter
arrangements.

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Continued-Revenue: Definition…

Barter of advertising space on web pages, in

magazines and TV programs. Many internet
companies recognize revenue from barter
transactions.
SIC-31: Revenue – Barter Transactions
Involving Advertising Services
Revenue from a barter transaction involving
advertising cannot be measured reliably at the
fair value of advertising services received.

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Continued-Revenue: Definition…

A Seller can reliably measure revenue at the fair

value of the advertising services it provides in a
barter transaction, by reference only to non-
barter transactions that:
• involve advertising similar to the advertising in the
barter transaction;
• occur frequently;
• represent a predominant number of transactions and
amount to provide advertising in the barter
transaction;

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Continued-Revenue: Definition…

• involve cash and/or another form of

consideration (e.g., marketable securities,
non-monetary assets, and other services) that
has a reliably measurable fair value; and
• do not involve the same counterparty as in the
barter transaction.

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Revenue-Overview

Revenue can generally arise from the

following transactions:
• Sale of goods
• Rendering of services
• Interest, Royalties and Dividends

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Revenue Arising from the Sale of Goods

Revenue arising from the sale of goods should be

recognized when:
• The risks and rewards of ownership of goods have
been transferred to the buyer;
• The enterprise retains neither continuing managerial
involvement nor effective control over the goods
involved;
• The amount of revenue can be measured reliably;
• It is probable that the economic benefits associated
with the transaction will flow to the enterprise; and
• The costs incurred (or to be incurred) in respect of the
transaction can be measured reliably.

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Continued-Revenue Arising…
In the following situations, the significant risks and
rewards of ownership would generally be
deemed not transferred:
• When the company retains an obligation for
unsatisfactory performance not covered by normal
warranty provisions,
• When the receipt of revenue from a particular sale is
contingent on the derivation of revenue by the buyer
from its sale of the goods,
• When the goods are shipped subject to installation and
the installation is a significant part of the contract
which has not yet been completed by the company,
and
• When the buyer has the right to rescind the purchase
for a reason specified in the sales contract.
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Continued-Revenue Arising…
Examples:
• A contract for the sale of an oil refinery stipulates that
installation of the refinery is an integral part of the
contract. Revenue will not be recognized by the
enterprise until it completes the installation of the
refinery.
• Goods are sold on approval, whereby the buyer has
negotiated a limited right of return. Revenue is not
recognized until the shipment has been formally
accepted by the buyer.
• When the goods are delivered only when the buyer
makes the final payment in a series of installments,
revenue is not recognized until the last and final
payment is received by the enterprise.

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Revenue Arising from the
Rendering of Services

Revenue arising from the rendering of

services should be recognized by reference
to the stage of completion of the
transaction if the outcome of the
transaction can be estimated reliably.

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Continued-Revenue Arising…
The outcome of a transaction can be estimated
reliably when:
• The amount of revenue can be reliably measured;
• It is probable that the economic benefits associated
with the transaction will flow to the enterprise;
• the stage of completion of the transaction can be
reliably measured; and
• The costs incurred in respect of the transaction and
the costs to complete the transaction and can be
reliably measured.

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Continued-Revenue Arising…

When the outcome of a transaction involving

the rendering of services cannot be
reliably estimated, revenue should be
recognized only to the extent of expenses
recognized.

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Interest, Royalties and Dividends

Interest, royalty and dividend revenue should be

recognized on the following bases:
• For interest revenue, on a time proportionate basis
that takes into account the effective interest yield on
the asset;
• For royalties, on an accrual basis in accordance with
the substance of the relevant agreement; and
• For dividend revenue, when the stockholder’s right to
receive payment is established.

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Continued-Interest, Royalties…

Interest, royalty and dividend revenue should only

be recognized as income on the above base
when:
• it is probable that the economic benefits associated
with the transaction will flow to the enterprise; and
• the amount of the revenue can be reliably measured.
Dividend income is recognized in the income
statement on the date that the dividend is
declared.

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Disclosure
An enterprise presenting information that reflects revenue
is required to disclose the following:
• Accounting policies adopted for revenue recognition,
• Methods to determine the stage of completion for revenue
recognition relating to the rendering of services,
• Amounts of revenue attributable to each significant category
should be disclosed separately as follows:
-Sale of goods
-Rendering of services
-Interest
-Royalties
-Dividends
• Amount of revenue fro the exchange of goods and services for
each significant category.

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