IAS 18 : Revenue The Institute of Chartered Accountants of India (Set up by an Act of Parliament)

2 IAS 18 v AS 9  Measurement  IAS 18 – Fair Value / Discounting  Method  IAS 18 – Proportionate completed method only  AS 9 – Completed service contract method also  Interest Revenue  IAS 19 – Effective interest method  AS 9 – Time proportion basis

Scope Applies to revenue from  The sale of goods  The rendering of services  Use by others of assets belonging to the activities and giving rise interest, royalties and dividends 3

Exclusions IAS 18 does not apply to revenue from  Lease agreements (IAS 17)  Dividends from investment in associates (IAS 28)  Insurance contracts (IAS 4)  Changes in the fair value of financial assets and liabilities or their disposal (IAS 39)  Changes in the fair value of other current assets  Initial recognition and changes in the fair value of biological assets related to agricultural activity (IAS 41)  Initial recognition of agricultural produce (IAS 41)  The extraction of mineral ores  Construction contracts (IAS 11) 4

Key Terms - Revenue Is the gross inflow of economic benefits during the period arising in the course of ordinary activities when those inflows result in increases in equity, other than increases relating to contributions from equity participants 5

Revenue Includes only amount on own account Excludes amount collected on behalf of third parties such as  Sales tax  GST  VAT  Amount collected on behalf of principal as in agency relationship 6

Income vs Revenue Income  is increases in economic benefits  during the accounting period  in the form of inflows or enhancements of assets or decreases of liabilities  that result in increases in equity,  other than those relating to contributions from equity participants Income includes  Revenue  Gains Gains – example  Disposal of non-current assets 7

Identification of the Transaction Segmenting:  Recognition criteria usually applied separately to each transaction.  Sometimes applied to the separately identifiable components of a single transaction in order to reflect the substance of the transaction Example:  when the selling price of a product includes an identifiable amount for subsequent servicing, that amount is deferred and recognised as revenue over the period during which the service is performed. 8

Identification of the transaction Combining:  Also applied to two or more transactions together when they are linked in such a way that the commercial effect cannot be understood without reference to the series of transactions as a whole. Example:  an entity may sell goods and,at the same time, enter into a separate agreement to repurchase the goods at a later date, thus negating the substantive effect of the transaction; in such a case, the two transactions are dealt with together. 9

Revenue from Sale of Goods Goods includes  Goods produced by the party for the purpose of sale  Goods purchased for resale 10

Revenue from Sale of Goods Recognize when ALL the following conditions are satisfied  The entity has transferred to the buyer the significant risks and rewards of ownership of goods  The entity retains neither continuing involvement to the degree usually associated with ownership nor effective control over the goods sold  The amount of revenue can be measured reliably  It is probable that the economic benefits associated with the transaction will flow to the entity  The costs incurred or to be incurred in respect of the transaction can be measured reliably 11

Revenue from Rendering of Services Recognize  By reference to the stage of completion at the end of reporting period  When outcome of a transaction can be estimated reliably

Revenue from Rendering of Services Outcome of a transaction can be estimated reliably if ALL the following conditions are satisfied  The amount of revenue can be measured reliably  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 end of the reporting period can be measured reliably  The costs incurred on the transaction and the costs to complete the transaction can be measured reliably 13

Revenue from Interest, Royalties and Dividends General Principle  It is probable that the economic benefits associated with the transaction will flow to the entity; and  The amount of revenue can be measured reliably 14

Revenue from Interest Recognize using the effective interest method when  The amount of revenue can be measured reliably  It is probable that the economic benefits associated with the transaction will flow to the entity 15

Revenue from Interest When unpaid interest has accrued before the acquisition of an interest-bearing investment, allocate subsequent receipt of interest between pre-acquisition and post-acquisition periods Recognise only the post-acquisition portion as revenue. 16

Revenue from Royalty Recognize on accrual basis in accordance with the substance of the relative agreement when  The amount of revenue can be measured reliably  It is probable that the economic benefits associated with the transaction will flow to the entity 17

Revenue from Dividend Recognize when  The amount of revenue can be measured reliably  It is probable that the economic benefits associated with the transaction will flow to the entity  The shareholder’s right to receive payment is established 18

Uncertainty over Collection If arises after recognition  Recognize as an expense & not as an adjustment from revenue 19

Disclosures Accounting policies adopted for recognition of revenue Methods adopted to determine the stage of completion of transactions involving the rendering of services Amount of each significant category of revenue including revenue arising from  Sale of goods  Rendering of services  Interest  Royalties  Dividend Amount of revenue arising from the exchange of goods or services included in each significant category of revenue Contingent liabilities and contingent assets from items such as warranty costs, claims, penalties or possible losses 20