Saturday, November 30, 2013

[IFRS] IAS 18 Revenue - Part 1: Introduction & Measurement of Revenue

The primary focus of a user of financial statement is to get information about the profitability of an entity. The major determinant of profits is revenue. Revenue Recognition has two important aspects from the user’s perspective, namely the timing and the quantum.

To identify the criterions for revenue recognition, i.e. to determine when it is probable that future economic benefits will flow to the entity and whether these benefits can be measured reliably.

This standard prescribes the accounting treatment of revenue for transactions related to
  • Sale of goods
  • Rendering of services
  • Use of entity’s assets yielding interest, royalties and dividends

The Standard does not deal with any revenue arising in following cases
  • Revenue from leasing of property, covered by IAS 17, Leases
  • Any dividends from investments, which are accounted as per equity method, covered by IAS 28, Investment in Associates
  • Any income from Insurance contracts, covered by IFRS 4, Insurance Contracts
  • Changes in fair value of financial assets and financial liabilities or their disposal, covered by IFRS 9, Financial Instruments
  • Changes in the value of current asset
  • Recognition of revenue or change in value of biological assets or agriculture produce, which is covered by IAS 41, Agriculture
  • Revenue from extraction of mineral ores, covered by IFRS 6, Exploration for and Evaluation of Mineral Resources
Measurement of Revenue 

Revenue is measured at the fair value of the consideration received or receivable. Any trade discount or volume rebates are considered while determining fair value. In normal business transactions, the consideration is received in form of cash and cash equivalents. 

In case, where the revenue consideration (i.e. the inflow of cash and cash equivalent) is deferred and the fair value of the consideration receivable is less than the nominal amount of cash and cash equivalents to be received,
  • then the revenue is recognized after discounting the fair value of the consideration receivable and the difference is recognized as interest revenue, in accordance with IFRS9
This in effect brings out the financing arrangement between the parties on books. The discount rate is the prevailing rate for a similar instrument or the rate discounting the nominal amount to the current cash sales price of the goods or services 
  • If the entity provides interest free credit to buyer, then the fair value of the consideration is determined by discounting all future receipts using imputed rate of interest.
An exchange of goods or services of similar nature is not regarded as a revenue transaction. In telecom sector, the capacities are exchanged, commonly known as swaps. In such cases, the revenue is recognized on the basis of the substance of the transaction. 

When goods or services are swapped for dissimilar goods or services, then the exchange is regarded as revenue transaction. The revenue (adjusted by any amount of cash or cash equivalent transferred) is measured at fair value of goods or services received, OR fair value of goods or services given up which ever can be more reliably measured