Clarifications to IFRS 15 regarding Revenue from Contracts with Customers

In May 2014, the IASB and the US national standard-setter, the FASB, jointly issued a new revenue Standard – IFRS 15 Revenue from Contracts with Customers and Topic 606 Revenue from Contracts with Customers.

Following the discussions conducted at meetings of the Transition Resource Group (TRG), which was set up jointly by the IASB and the US FASB to support companies in implementing the new revenue Standard after it was issued in May 2014, further on 30 July 2015 the IASB published for public consultation some proposed clarifications to and transition reliefs for IFRS 15 Revenue from Contracts with Customers.

The Exposure Draft proposes to clarify :

• how to identify the performance obligations in a contract;
• how to determine whether a party involved in a transaction is the PRINCIPAL (responsible for providing the goods or services) or the AGENT (responsible for arranging for the goods or services to be provided to the customer); and
• how to determine whether a licence provides the customer with a right access or a right to use the entity’s intellectual property.

In Questions for Respondents part, concerning the Question 1 – Identifying performance obligations, it states that IFRS 15 requires an entity to assess the goods or services promised in a contract to identify the performance obligations in that contract. An entity is required to identify performance obligations on the basis of promised goods or services that are distinct. To clarify the application of the concept of ‘distinct’, the IASB is proposing to amend the Illustrative Examples accompanying IFRS 15. In order to achieve the same objective of clarifying when promised goods or services are distinct, the FASB has proposed to clarify the requirements of the new revenue Standard and add illustrations regarding the identification of performance obligations. The FASB’s proposals include amendments relating to promised goods or services that are immaterial in the context of a contract, and an accounting policy election relating to shipping and handling activities that the IASB is not proposing to address. The reasons for the IASB’s decisions are explained in paragraph BC7-BC25 of the ED.

Regarding the Principal versus Agent considerations as concerned in Question 2, the ED states further that when another party is involved in providing goods or services to a customer, IFRS 15 requires an entity to determine whether it is the PRINCIPAL in the transaction or the AGENT. To do so, an entity assesses whether it controls the specified goods or services before they are transferred to the customer. To clarify the application of the CONTROL principle, the IASB is proposing to amend paragraphs B34-B38 of IFRS 15, amend Examples 45-48 accompanying IFRS 15 and add Examples 46A and 48A. The FASB has reached the same decisions as the IASB regarding the application of the control principle when assessing whether an entity is a principal or an agent, and is expected to propose amendments to Topic 606 that are the same as (or similar to) those included in this ED in this respect. The reasons for the Boards’ decisions are explained in paragraphs BC26-BC56.

In addition, the IASB also proposes two reliefs to aid the transition to the new revenue standard.

The IASB is seeking comments on this ED by 28 October 2015.

IFRS 15 regarding Revenue from Contracts with Customers, reasons for issuing the IFRS

In May 2014, the IASB and the US national standard-setter, the FASB, jointly issued a new revenue Standard – IFRS 15 Revenue from Contracts with Customers and Topic 606 Revenue from Contracts with Customers. IFRS 15 provides a comprehensive framework for recognising revenue from contracts with customers.

Reasons for issuing the IFRS

Revenue is an important number to users of financial statements in assessing an entity’s financial performance and position. However, previous revenue recognition requirements in IFRS differed from those in US GAAP and both sets of requirements were in need of improvement. Previous revenue recognition requirements in IFRS provided limited guidance, and, consequently, the two main revenue recognition Standards, IAS 18 Revenue and IAS 11 Construction Contracts, could be difficult to apply to complex transactions. In addition, IAS 18 provided limited guidance on many important revenue topics such as accounting for multiple-element arrangements. In contrast, US GAAP comprised broad revenue recognition concepts together with numerous revenue requirements for particular industries or transactions, which sometimes resulted in different accounting for economically similar transactions.

Accordingly, the IASB and the US national standard-setter, the FASB initiated a joint project to clarify the principles for recognising revenue and to develop a common revenue standard for IFRS and US GAAP that would :

1. remove inconsistencies and weaknesses in previous revenue requirements;
2. provide a more robust framework for addressing revenue issues;
3. improve comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets;
4. provide more useful information to users of financial statements through improved disclosure requirements; and
5. simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer.

IFRS 15, together with Topic 606 that was introduced into the FASB Accounting Standards Codification by Accounting Standards Update 2014-09 Revenue from Contracts with Customers (Topic 606), completes the joint effort by the IASB and the FASB to meet those objectives and improve financial reporting by creating a common revenue recognition standard for IFRS and US GAAP.

IFRS 15 will be effective for annual reporting periods beginning on or after 1 January 2017. Earlier application is permitted. If an entity applies this Standard earlier, it shall disclose the fact.

IFRS 15 supersedes the following Standards :

1. IAS 11 Construction Contracts;
2. IAS 18 Revenue;
3. IFRIC 13 Customer Loyalty Programmes;
4. IFRIC 15 Agreements for the Construction of Real Estate;
5. IFRIC 18 Transfer of Assets from Customers; and
6. SIC-31 Revenue-Barter Transactions Involving Advertising Services

Latest, on 22 July 2015 the IASB issued a press release letter which confirmed a one-year deferral of effective date of IFRS 15 to 1 January 2018.

The revenue Standard was issued jointly by the IASB and the US Financial Accounting Standards Board (FASB) in May 2014 with an effective date of 1 January 2017. Both Boards have now confirmed a one-year deferral of the effective date. Companies applying IFRS continue to have the option to apply the Standard earlier if they wish to do so.

Revenue Recognition from Rendering of Services

In general, IAS 18, Revenue states that revenue is recognized when it is probable that future economic benefits will flow to the entity and these benefits can be measured reliably.

How this standard regulates the revenue recognition particularly from rendering of services ?

Paragraph 20 of IAS 18 states that when the outcome of a transaction involving the rendering of services can be estimated reliably, revenue associated with the transaction shall be recognized by reference to the stage of completion of the transaction at the end of the reporting period.

The outcome of a transaction can be estimated reliably when all the following conditions are satisfied :

1. the amount of revenue can be measured reliably;
2. it is probable that the economic benefits associated with the transaction will flow to the entity;
3. the stage of completion of the transaction at the end of the reporting period can be measured reliably; and
4. the costs incurred for the transaction and the costs to complete the transaction can be measured reliably

The recognition of revenue by reference to the stage of completion of a transaction is often referred to as the percentage of completion method. Under this method, revenue is recognized in the accounting periods in which the services are rendered. The recognition of revenue on this basis provides useful information on the extent of service activity and performance during a period.

While, paragraph 22 states that revenue is recognized only when it is probable that the economic benefits associated with the transaction will flow to the entity. However, when an uncertainty arises about the collectibility of an amount already included in revenue, the uncollectible amount, or the amount in respect of which recovery has ceased to be probable, is recognized as an expense, rather than as an adjustment of the amount of revenue originally recognized.

Regarding the requirement of the existence of reliable estimation as stated in para. 20, further, para. 23 states that an entity is generally able to make reliable estimates after it has agreed to the following with the other parties to the transaction :

1. each party’s enforceable rights regarding the service to be provided and received by the parties;
2. the consideration to be exchanged; and
3. the manner and terms of settlement

The stage of completion of a transaction may be determined by a variety of methods. An entity uses the method that measures reliably the services performed. Depending on the nature of the transaction, the methods may include :

1. surveys of work performed;
2. services performed to date as a percentage of total services to be performed; or
3. the proportion that costs incurred to date bear to the estimated total costs of the transaction.

For practical purposes, when services are performed by an indeterminate number of acts over a specified period of time, revenue is recognized on a straight-line basis over the specified period unless there is evidence that some other method better represents the stage of completion. When a specific act is much more significant than any other acts, the recognition of revenue is postponed until the significant act is executed (Hrd).

Revenue recognition while an entity is acting as a Principal or as an Agent

Based on IAS 18, Revenue, in general term, revenue is recognized only when it is probable that the economic benefits associated with the transaction will flow to the entity and these benefits can be measured reliably.

Para. 8 of IAS 18 states that revenue includes only the gross inflows of economic benefits received and receivable by the entity on its own account. Amounts collected on behalf of third parties such as sales taxes, goods and services taxes and value added taxes are not economic benefits which flow to the entity and do not result in increases in equity. Therefore, they are excluded from revenue. Similarly, in an AGENCY relationship, the gross inflows of economic benefits include amounts collected on behalf of the PRINCIPAL and which do not result in increases in equity for the entity. The amounts collected on behalf of the principal are not revenue. Instead, revenue is the amount of commission.

Further, para. 21 of the Illustrative Examples of IAS 18 IE (Part B of IFRS 2010) provides guidance in determining whether an entity is acting as a PRINCIPAL or as an AGENT (as amended in IFRS 2009).

Such guidance states that determining whether an entity is acting as a principal or as an agent requires judgment and consideration of all relevant facts and circumstances.

An entity is acting as a PRINCIPAL when it has exposure to the significant risks and rewards associated with the sale of goods or the rendering of services. Features that indicate that an entity is acting as a principal include :

1. the entity has the primary responsibility for providing the goods or services to the customer or for fulfilling the order, for example by being responsible for the acceptability of the products or services ordered or purchased by the customer;
2. the entity has inventory risk before or after the customer order, during shipping or on return;
3. the entity has latitude in establishing prices, either directly or indirectly, for example by providing additional goods or services; and
4. the entity bears the customer’s credit risk for the amount receivable from the customer.

An entity is acting as an AGENT when it does not have exposure to the significant risks and rewards associated with the sale of goods or the rendering of services. One feature indicating that an entity is acting as an agent is that the amount the entity earns is predetermined, being either a fixed fee per transaction or a stated percentage of the amount billed to the customer.

Read also : FASB EITF Issue No. 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent

ED of Revenue from Contracts with Customers

The International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) today (24 June 2010) published for public comment a draft standard to improve and align the financial reporting of revenue from contracts with customers and related costs.

If adopted, the proposal would create a single revenue recognition standard for International Financial Reporting Standards (IFRSs) and US generally accepted accounting principles (GAAP) that would be applied across various industries and capital markets. The publication of this joint proposal represents a significant step forward toward global convergence in one of the most important and pervasive areas in financial reporting. The proposed standard would replace IAS 18 Revenue, IAS 11 Construction Contracts and related interpretations. In US GAAP, it would supersede most of the guidance on revenue recognition in Topic 605 of the FASB Accounting Standards Codification.

The core principle of the draft standard is that an entity should recognise revenue from contracts with customers when it transfers goods or services to the customer in the amount of consideration the entity receives, or expects to receive, from the customer. The proposed standard would improve both IFRSs and US GAAP by:

• removing inconsistencies in existing requirements;
• providing a more robust framework for addressing revenue recognition issues;
• improving comparability across companies, industries and capital markets;
• requiring enhanced disclosure; and
• clarifying the accounting for contract costs.

The exposure draft Revenue from Contracts with Customers is open for comment until 22 October 2010 and can be accessed via the ‘Comment on a Proposal’ section of www.iasb.org or on www.fasb.org. A live webcast introducing the proposals is planned for early July - details will be available on the FASB and IASB websites soon. An IASB ‘Snapshot’ and an ‘FASB In Focus’, high level summaries of the proposals, will be available in due course to download free of charge from the IASB and FASB websites: http://go.iasb.org/revenue+recognition and http://www.fasb.org.

Source : www.iasb.org

 

Measurement of Revenue

IAS 18, par. 9 states that revenue shall be measured at the Fair Value of the consideration received or receivable.

The amount of revenue arising on a transaction is usually determined by agreement between the entity and the buyer or user of the asset. It is measured at the fair value of the consideration received or receivable taking into account the amount of any trade discounts and volume rebates allowed by the entity (par. 10).

Further, par. 11 of IAS 18 states that in most cases, the consideration is in the form of cash or cash equivalents and the amount of revenue is the amount of cash or cash equivalents received or receivable. However, when the inflow of cash or cash equivalents is deferred, the fair value of the consideration may be less than the nominal amount of cash received or receivable.

For example, an entity may provide interest free credit to the buyer or accept a note receivable bearing a below-market interest rate from the buyer as consideration for the sale of goods. When the arrangement effectively constitutes a financing transaction, the fair value of the consideration is determined by discounting all future receipts using an imputed rate of interest.

The imputed rate of interest is the more clearly determinable of either :

1. the prevailing rate for a similar instrument of an issuer with a similar credit rating; or
2. a rate of interest that discounts the nominal amount of the instrument to the current cash sales price of the goods or services.

The difference between the fair value and the nominal amount of the consideration is recognized as interest revenue in accordance with par. 29 and 30 and in accordance with IAS 39.

When goods or services are exchanged or swapped for goods or services which are of a similar nature and value, the exchange is not regarded as a transaction which generates revenue. This is often the case with commodities like oil or milk where suppliers exchange or swap inventories in various locations to fulfil demand on a timely basis in a particular location. When goods are sold or services are rendered in exchange for dissimilar goods or services, the exchange is regarded as a transaction which generates revenue. The revenue is measured at the fair value of the goods or services received, adjusted by the amount of any cash or cash equivalents transferred. When the fair value of the goods or services received cannot be measured reliably, the revenue is measured at the fair value of the goods or services given up, adjusted by the amount of any cash or cash equivalents transferred (par. 12).

Revenue Recognition, the latest update from IASB

The International Accounting Standards Board met in London on 14 - 18 September 2009, when it discussed:

• Financial crisis
  
  • - Derecognition
    
  • - Financial instruments: replacement of IAS 39
    
  • - Classification of rights issues
    
• Conceptual framework
  
• Financial instruments with characteristics of equity
  
• Financial statement presentation
  
• Insurance contracts
  
• Leases
  
• Liabilities: Amendments to IAS 37
  
• Post-employment benefits
  
• Related party disclosures
  
• Revenue recognition
  

REVENUE RECOGNITION

Here is the summary from the IASB meeting regarding on Revenue Recognition.

The Board discussed:

• the definition of control for determining when goods and services are transferred to a customer; and
  
• options to acquire additional goods and services.
  

Control

In the Discussion Paper Preliminary Views on Revenue Recognition in Contracts with Customers the Board proposed that an entity should recognise revenue when it satisfies its performance obligations to a customer by transferring goods and services to the customer. An entity has transferred a good or a service when the customer obtains control of it.

At this meeting, the Board:

• Considered the following working definition of control: 'control of a good or a service is an entity's present ability to direct the use of and receive the benefit from that good or service'.
  
• Decided tentatively that an entity should assess the transfer of control from the perspective of the customer.
  
• Considered the following indicators that the customer has obtained control of the promised asset and examples applying those indicators:
  
  • The customer has an unconditional obligation to pay for the asset (and the payment is non-refundable).
    
  • The customer has legal title to the asset.
    
  • The customer can sell the asset to (or exchange the asset with) another party.
    
  • The customer has physical possession of the asset.
    
  • The customer has the practical ability to take possession of the asset.
    
  • The customer specifies the design or function of the asset.
    
  • The customer has continuing managerial involvement with the asset.
    
  • The customer can secure or settle debt with the asset.
    

The staff will continue to refine the definition of control and the indicators for discussion at future meetings. For example, one of the concerns expressed by the Board was how the control definition would be applied to an asset under construction.

Options to acquire additional goods and services

The Board considered how an entity would determine whether options to acquire additional goods and services are part of a present contract with a customer, and, if so, how the entity would account for them.

The Board decided tentatively as follows:

• An entity should account for an option to acquire additional goods and services granted in a contract with a customer as a performance obligation in that contract if that option provides a material right to the customer that the customer would not receive without entering into that contract. An example would be a material discount on additional goods and services that the customer would not otherwise receive. An entity should account for that performance obligation by allocating to it a portion of the transaction price relative to the standalone selling price of the option.
  
• In some cases, an entity may estimate the standalone selling price of the option by reference to:
  
  • the discount the customer would obtain when exercising the option, adjusted for:
    
  • the discount that the customer could receive without exercising the option; and
    
  • the likelihood that the option would be exercised.
    

The staff proposed that an entity should apply this approach when the standalone selling price of the option is not directly observable. However, the Board directed the staff to consider this further, noting that there may be circumstances in which the time value component of an option should not be ignored.

• If a customer has an option to acquire additional goods and services, and those goods and services are:
  
  • similar in nature to the other goods and services in the contract; and
    
  • provided in accordance with terms and conditions (including pricing) in the contract the allocation of the transaction price should reflect the optional goods and services (and corresponding customer consideration), on an expected (ie probability-weighted) basis.
    

the allocation of the transaction price should reflect the optional goods and services (and corresponding customer consideration), on an expected (ie probability-weighted) basis.

Go to the project page on the IASB website

Revenue recognition from the sale of goods

Revenue from the sale of goods should be recognized if all of the five conditions mentioned below are met.

(1) The reporting entity has transferred significant risks and rewards of ownership of the goods to the buyer;

(2) The entity does not retain either continuing managerial involvement (akin to that usually associated with ownership) or effective control over the goods sold;

(3) The quantum of revenue to be recognized can be measured reliably;

(4) The probability that economic benefits related to the transaction will flow to the entity exists; and

(5) The costs incurred or to be incurred in respect of the transaction can be measured reliably.

The determination of the point in time when a reporting entity is considered to have transferred the significant risks and rewards of ownership in goods to the buyer is critical to the recognition of revenue from the sale of goods.

If upon examination of the circumstances of the transfer of risks and rewards of ownership by the entity it is determined that the entity could still be considered as having retained significant risks and rewards of ownership, the transaction could not be regarded as a sale.

Some examples of situations illustrated by the standard in which an entity may be considered to have retained significant risks and reward of ownership, and thus revenue is not recognized, are set out below.

(1) A contract for the sale of an oil refinery stipulates that installation of the refinery is an integral and a significant part of the contract. Therefore, until the refinery is completely installed by the reporting entity that sold it, the sale would not be regarded as complete.

(2) Goods are sold on approval, whereby the buyer has negotiated a limited right of return. Since there is a possibility that the buyer may return the goods, revenue is not recognized until the shipment has been formally accepted by the buyer, or the goods have been delivered as per the terms of the contract, and the time stipulated in the contract for rejection has expired.

(3) In the case of “layaway sales,” under terms of which the goods are delivered only when the buyer makes the final payment in a series of installments, revenue is not recognized until the last and final payment is received by the entity. However, based upon experience, if it can reasonably be presumed that most such sales are consummated, revenue may be recognized when a significant deposit in received from the buyer and goods are on hand, identified and ready for delivery to the buyer.

If the reporting entity retains only an insignificant risk of ownership, the transaction is considered a sale and revenue is recognized.

Another important condition for recognition of revenue from the sale of goods is the existence of the probability that the economic benefits will flow to the entity. For example, for several years an entity has been exporting goods to a foreign country. In the current year, due to sudden restrictions by the foreign government on remittances of currency outside the country, collections from these sales were not made by the entity. As long as it is uncertain if these restrictions will be removed, revenue should not be recognized from these exports, since it may not be probable that economic benefits in the form of collections will flow to the entity. Once the restrictions are withdrawn and uncertainty is removed, revenue may be recognized.

Yet, another important condition for recognition of revenue from the sale of goods relates to the reliability of measuring costs associated with the sale of goods. Thus, if expenses such as those relating to warranties or other post-shipment costs cannot be measured reliably, then revenue from the sale of such goods should also not he recognized. This rule is based on the principle of matching of revenues and expenses.

(Sources : Wiley IFRS 2008 : Interpretation and Application of International Financial Reporting Standards - Barry J. Epstein, Eva K. Jermakowicz)

When to Recognize Revenue ?

“Revenue is recognized when it is probable that future economic benefits will flow to the entity and these benefits can be measured reliably” (IAS 18 Revenue).

Revenue can take various forms, such as sales of goods, provision of services, royalty fees, franchise fees, management fees, dividends, interest, subscriptions, and so on.

The principle issue in the recognition of revenue is its timing – at what point is it probable that future economic benefit will flow to the entity and can the benefit be measured reliably.

Some of the recent highly publicized financial scandals that caused turmoil in the financial world globally were allegedly the result of financial manipulations resulting from recognizing revenue based on inappropriate accounting policies. Such financial shenanigans resulting from the use of aggressive revenue recognition policies have drawn the attention of the accounting world to the importance of accounting for revenue.

It is absolutely critical that the point of recognition of revenue is properly determined. For instance, in case of sale of goods, is revenue to be recognized on receipt of the customer order, on completion of production, on the date of shipment, or on delivery of goods to the customer ? The decision as to when and how revenue should be recognized has a significant impact on the determination of “net income” for the year (i.e., the “bottom line”), and thus it is a very critical element in the entire process of the preparation of the financial statements.

Revenue from the sale of goods should be recognized when all of the following criteria are satisfied :

(a) the significant risks and rewards of ownership of the goods have been transferred to the buyer

(b) the seller retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold

(c) the amount of the revenue can be reliably measured

(d) it is probable that economic benefits associated with the transaction will flow to the seller

(e) the costs incurred or to be incurred in respect of the transaction can be measured reliably.

The transfer of “significant” risks and rewards is essential. For example, if goods are sold but the receivable will be collected only if the buyer is able to sell, then “significant” risks of ownership are retained by the original seller and no sale is recognized.

The point of time at which significant risks and rewards of ownership transfer to the buyer requires careful consideration involving examining the circumstances surrounding the transaction. Generally, the transfer of significant risks and rewards of ownership takes place when title passes to the buyer or the buyer received possession of the goods. However, in some circumstances, the transfer of risks and rewards of ownership does not coincide with transfer of legal title or the passing of possession, as when a building that is still under construction is sold.

Revenue from the rendering of services can be recognized by reference to stage of completion if the final outcome can be reliably estimated. This would be the case if :

(a) the amount of revenue can be measured reliably

(b) it is probable that economic benefits associated with the transaction will flow to the seller

(c) the stage of completion can be measured reliably

(d) the cost incurred and the cost to complete can be measured reliably.

Revenue arising from the use by others of an entity’s asset that yield interest, dividends, or royalties are recognized in this way :

(a) Interest is recognized using the “effective interest method”

(b) Royalties are recognized on an accrual basis in accordance with the royalty agreement

(c) Dividends are recognized when the shareholder has a right to receive payment.

Source of this article : IFRS Practical Implementation Guide and Workbook (Second Edition) - Abbas Ali Mirza, Magnus Orrell and Graham J. Holt

For further reference, read also a related article from CFO.com regarding on Revenue Recognition in here >>

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)