Revenue

 Definition of Income: ◦ 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 – Conceptual Framework ◦ It encompasses both revenue and gains ◦ Revenue = ordinary business activities ◦ Gains e.g. from other activities – e.g. revaluation gain

 Definition of Revenue: the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity when those inflows result in increases in equity, other than increases relating to contributions from equity participants

 sale of goods,  rendering of services, and  use by others of entity assets yielding interest, royalties and dividends.  Revenue only includes: the gross inflows of economic benefits that are received or receivable by that entity for its own account Amounts collected on behalf of a principal in an agency relationship do not constitute revenue in the hands of the agent.

 the entity that has exposure to the significant risks and rewards associated with the sale of goods or the rendering of services is the principal  Entity with no exposure = agent.  Indicators that an entity is the principal: o the entity has the primary responsibility for providing the goods or services or for fulfilling the order; o the entity has the inventory risk; o the entity has latitude in establishing the prices; and o the customer’s credit risk is borne by the entity

 Measured at fair value of consideration received or receivable.  Fair value definition: ◦ the price that would be received to sell an asset or ◦ paid to transfer a liability ◦ in an orderly transaction between market participants ◦ at the measurement date. E.g. Stainbank pg. 2 Uncertainty of collectability of amounts included in revenue – the uncollectible amount should be expensed rather than be included as an adjustment to revenue

 Revenue from sale of goods:  All the following must be satisfied: ◦ the enterprise has transferred to the buyer the significant risks and rewards of ownership, ◦ the seller retains neither;  continuing managerial involvement to the degree usually associated with ownership nor  effective control over the goods sold ◦ the amount of the revenue can be measured reliably, ◦ it is probable that the economic benefits associated with the transaction will flow to the entity, and ◦ the costs incurred or to be incurred in respect of the transaction can be measured reliably.

Related expenses Match expenses to revenue Only recognise revenue when expenses can be measured reliably consideration already received is recognised as a liability (deferred income / income received in advance). Discounts Two types; trade discounts and settlement discounts Trade discounts Trade discounts are an adjustment to the transaction price, recognised as an adjustment to revenue and include: bulk discounts, preferred customer discounts, and kickback discounts.

Settlement discounts Discount for prompt payment Estimated at time of sale and revenue reduced accordingly Where ultimately customer does not qualify for the settlement discount, excess amount paid is then recognised as revenue E.g. pg 4 Stainbank

 Revenue from the rendering of services: ◦ Recognised according to stage of completion method at reporting date, provided outcome of transaction can be estimated reliably. ◦ Outcome is estimated reliably when all of following is met :  the amount of revenue can be measured reliably,  it is probable that the economic benefits associated with the transaction will flow to the enterprise,  the stage of completion of the transaction at the reporting date can be measured reliably, and  the costs incurred for the transaction and the costs to complete the transaction can be measured reliably. ◦ When outcome can’t be recognised reliably, revenue recognised to extent of the expenses recognised that are recoverable. ◦ E.g. pg 7 Stainbank

 Substance of transaction determining factor in dealing with exchanges of goods & services  Swap of goods & services of similar nature & value ◦ No transaction has taken place thus no revenue is recognised  Swap of goods & services of dissimilar nature ◦ Substance of transaction is a sale of one item and a purchase of another. ◦ Revenue recognised at fair value of item received. ◦ Where fair value can’t be measured reliably – recognise revenue at fair value of item given up. ◦ Any consideration received is deducted from revenue

 Interest ◦ Time proportion basis taking into account the effective yield of the asset e.g. pg. 10  Royalties ◦ Recognised on an accrual basis  Dividends ◦ Recognised when shareholders rights to receive payment is established

 Definition: A method of conducting sales by billing the customer on the same day the transaction occurs, but not delivering the goods until a later date. A bill and hold transaction occurs when a company recognizes revenue before delivery takes place. Normally a revenue is not recognizable until goods are delivered or services are rendered. Exceptions are made when a customer specifically requests that the vendor delay delivery and has a legitimate business reason for the request

The following conditions need to be met in order to recognise a bill and hold sales transaction:  Payment for the goods needs to have taken place  Goods need to be separated from all other similar goods by the seller  Goods need to be finished and ready for use Problem!! This method may be used to inflate revenue figures.

The following needs to be disclosed in the financial statements:  Accounting policies adopted for recognition of revenue  Methods adopted for determining stage of completion for transactions involving rendering of services  Amount arising from: ◦ Sale of goods ◦ Rendering of services ◦ Interest ◦ Royalties ◦ Dividends; and  Amount of revenue arising from exchange of goods or services included in each of the above categories (i.e. from exchange of dissimilar items only)