IAS 18 Revenue, the Preliminary

International Accounting Standard (IAS) 18 Revenue was issued by the International Accounting Standards Committee in December 1993. It replaced IAS 18 Revenue Recognition (issued in December 1982).

Limited amendments to IAS 18 were made as a consequence of IAS 39 (in 1998), IAS 10 (in 1999) and IAS 41 (in January 2001).

In April 2001 the International Accounting Standards Board resolved that all Standards and Interpretations issued under previous Constitutions continued to be applicable unless and until they were amended or withdrawn.

Since then IAS 18 has been amended by the following IFRSs :

· IAS 39 Financial Instruments: Recognition and Measurement (as revised in December 2003)

· IFRS 4 Insurance Contracts (issued March 2004)

IAS 1 Presentation of Financial Statements (as revised in September 2007) amended the terminology used throughout IFRSs, including IAS 18.

The following Interpretations refer to IAS 18 :

· SIC-13 Jointly Controlled Entities – Non-Monetary Contributions by Venturers (issued December 1998 and subsequently amended)

· SIC-27 Evaluating the Substance of Transactions involving the Legal Form of a Lease (issued December 2001 and subsequently amended)

· SIC-31 Revenue – Barter Transactions involving Advertising Services (issued December 2001 and subsequently amended)

· IFRIC 12 Service Concession Arrangements (issued November 2006 and subsequently amended)

· IFRIC 13 Customer Loyalty Programmes (issued June 2007)

This standard shall be applied in accounting for revenue arising from the following transactions and events : (a) the sale of goods, (b) the rendering of services, and (c) the use by others of entity assets yielding interest, royalties and dividends.

This standard does not deal with revenue arising from :

1. Lease agreements (see IAS 17 Leases);

2. Dividends arising from investments which are accounted for under the equity method (see IAS 28 Investments in Associates);

3. Insurance contracts within the scope of IFRS 4 Insurance Contracts;

4. Changes in the fair value of financial assets and financial liabilities or their disposal (see IAS 39 Financial Instruments: Recognition and Measurement);

5. Changes in the value of other current assets;

6. Initial recognition and from changes in the fair value of biological assets related to agricultural activity (see IAS 41 Agriculture);

7. Initial recognition of agricultural produce (see IAS 41); and

8. The extraction of mineral ores.

Income is defined in the Framework for the Preparation and Presentation of Financial Statements as 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 encompasses both revenue and gains.

Revenue is income that arises in the course of ordinary activities of an entity and is referred to by a variety of different names including sales, fees, interest, dividends and royalties.

Revenue is recognized when it is probable that future economic benefits will flow to the entity and these benefits can be measured reliably.

In the normal sale of goods, revenue is presumed to have been realized when the significant risks and rewards have been transferred to the buyer, accompanied by the forfeiture of effective control by the seller, and the amount to be received can be reliably measured.

For most routine transactions, this occurs when the goods have been delivered to the customers.

Revenue recognition for service transactions, as set forth in revised IAS 18, requires that the percentage-of-completion method be used unless certain defined conditions are not met. Originally, reporting entities had a choice of methods – percentage-of-completion or completed contract.

For interest, royalties and dividends, recognition is warranted when it is probable that economic benefits will flow to the entity.

Specifically, interest is recognized on a time proportion basis, taking into account the effective yield on the asset. Royalties are recognized on an accrual basis, in accordance with the terms of the underlying agreement. Dividend income is recognized when the shareholder’s right to receive payment has been established.

Revenue shall be measured at the fair value of the consideration received or receivable.

Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.

(Source of this article : IAS 18 Revenue and Wiley – IFRS 2008 Interpretation and Application)