Chapter 9 - Revenue and Inventories

Question 0

WHEN DO YOU RECOGNISE REVENUE FROM THE SALE OF GOODS?

Answer 0

The following conditions must be satisfied before revenue from the sale of goods can be recognised:

• seller transfer RISK AND REWARDS OF OWNERSHIP to buyer
• seller doesn’t retain management/ control of good
• amount of revenue can be measured reliably
• economic benefit will flow to seller
• costs incurred can be measured reliably

(IAS 18, paragraph 14)

Question 1

WHEN DO YOU RECOGNISE REVENUE FROM THE SALE OF SERVICES?

Answer 1

Revenue from services is recognised according to the STAGE OF COMPLETION. The following conditions must be met:

• revenue can be measured reliably
• economic benefit will flow to the service provider
• stage of completion at reporting date can be reliably measured
• costs incurred can be measured reliably

If these conditions are not met then revenue should be restricted to any recoverable costs incurred.

(IAS 18, paragraph 20)

Question 2

SPECIFIC SCENARIOS:

CONSIGNMENT SALE

Answer 2

aka. ‘Sale and return basis’

Where the buyer of the goods undertakes to sell them on behalf of the original seller. The original seller only recognises the sale when the buyer sells them to a third party.

Car manufacturer = original seller
    |
Vauxhall garage = buyer
    |
Car buyer = third party

(IAS 18, paragraph 20)

Question 3

SPECIFIC SCENARIOS:

SUBSCRIPTION TO PUBLICATION

Answer 3

Each publication is of similar value so revenue is recognised on a straight line basis over the period in which the publications are dispatched.

(IAS 18, paragraph 7)

Question 4

SPECIFIC SCENARIOS:

SERVICING FEES INCLUDED IN THE PRICE OF THE PRODUCT

Answer 4

When an item’s sale price includes ‘free’ servicing, revenue in relation to that servicing should be deferred and recognised over the servicing period.

(IAS 18, paragraph 11)

Question 5

SPECIFIC SCENARIOS:

PRESENTATION OR TURNOVER AS PRINCIPAL OR AGENT

Answer 5

The issue is whether in a transaction on behalf of a third party a seller should record total turnover or merely the commission received from the third party. The substance of the arrangement needs to be examined.

e.g a holiday agent can only receive the commission on the holiday sale, they still owe the money for the flights/ hotel etc to the respective suppliers

(IAS 18, paragraph 21)

Question 6

SPECIFIC SCENARIOS:

LAY AWAY SALES

Answer 6

Goods are delivered once the final instalment has been received. It is only then that the risks and rewards of ownership are transferred. Revenue can then be recognised.

(IAS 18, paragraph 3)

Question 7

SPECIFIC SCENARIOS:

TUITION FEES

Answer 7

Revenue should be recognised over a period of time as and when services are provided.

(IAS 18, paragraph 16)