1. Re-thinking Revenue Recognition
Liesel Knorr, DRSC e.V.
Brussels, 18 October 2006

2. IFRSs on Revenue Recognition
IAS 18 Revenue
IAS 11 Construction Contracts
IAS 17 Leases
IAS 39 Financial Instruments: Recognition and Measurement
IAS 41 Agriculture
+ recourse to US GAAP

3. IAS 18 Revenue – Underlying Principle
Definition
Gross inflow of economic benefits during the period arising in the course of the ordinary activities (IAS 18.7)
Recognition
Probable that economic benefits will flow to the entity
Amount of revenue can be measured reliably
Measurement
Fair value of the consideration received or receivable (IAS 18.9)

4. IAS 18 Revenue – Underlying Principles (cont.)
Critical Events for the Recognition of Revenue
Sale of goods
Transfer of the significant risks and rewards to the buyer
Entity retains neither continuing managerial involvement nor effective control
Costs incurred can be measured reliably
Rendering of services
Stage of completion can be measured reliably

5. General Problems arising
From a conceptual perspective
Recourse to the realization principle in IAS 18 is said to be contradictory to the definition of revenues in the framework (income = measurable changes of assets and liabilities)
Application of IAS 18 can lead to recognition of deferred assets and deferred liabilities which do not meet the definition of assets and liabilities
From a practical perspective
Content of the realization principle often unclear (as evidenced by the need for extensive additional explanations in the appendix of IAS 18)
How to account for multiple element arrangements?

6. Current Developments Joint Project IASB and FASB (since 2002) Purpose:
IASB: (Conceptual) Revision of IAS 18 & IAS 11
FASB: Development of one single Statement on Revenue Recognition
together: Convergence!
Discussion Paper end of 2007 (?)

7. IASB addresses the issue of revenue recognition starting from the Framework definition of income
That is: “Income is measurable changes in assets and liabilities”
(= Assets and Liabilities Approach)
This approach shall not be overridden by notions of realization and completion of the earnings process.
New approach will also cover issues currently addressed by IAS 11

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