IAS 18 - Revenue Flashcards
When should revenue from the rendering of services be recognised?
Revenue from the rendering of services should be recognised when the following 4 criteria are met : -
1) The amount of the revenue can be measured reliably
2) It is probable that economic benefits will be received by the entity
3) The stage of completion of the transaction at the end of the reporting period can be assessed accurately.
4) The costs incurred can be measured reliably.
When should revenue from the sale of goods be recognised?
Revenue from the sale of goods should be recognised when the following 5 criteria have been met : -
1) The significant risks & rewards of ownership have been transferred from seller to buyer.
2) The seller no longer has control over the goods
3) The amount of the revenue can be measured reliably
4) It is probable that economic benefits will be received by the entity
5) The costs incurred in relation to the sale can be measured reliably.
How should revenue in respect of the rendering of services be recognised where the criteria is not met?
If the rendering of services criteria is not met, revenue should only be recognised to the extent of costs known to be recoverable from the customer.
What action is required where goods and services are bundled together into one transaction?
In such cases each component should be measured at its fair value and recognised as if seperately.
If the total of the fair values exceeds the overall price of the contract, an appropriate approach would be to apply the same discount percentage to each separate component.
EXAMPLE : Car dealer sells car, together with fuel for a year and one years service for £27,000. The fair values are :
Car = £28,000, Fuel = £1,200, Service = £800
Total fair value = £30,000 however package is sold for £27,000 = a £3,000 or 10% discount.
Therefore amount to be recognised =
CAR = £28,000 x 90% = £25,200 (recognised upon delivery)
FUEL = £1,200 x 90% = £1,080 (recognised on SL basis over 12mths)
SERVICE = £720 x 90% = £720 (recognise at earlier of when service is provided and end of the year)
What judgements are required with IAS 18?
> When do the risks and rewards of ownership of goods pass to the buyer?
In what circumstances is managements involvement in the asset retained?
How is decision made as to whether the stage of completion of a service transaction can be measured reliably.
