REVENUE RECOGNITION - IAS 18

Revenue is a SUBSET of income:
1. INCOME
  1. REVENUE
    1. arising from ordinary activities
  2. GAINS
    1. usually not arising from ordinary activities
General revenue recognition
1. probably FEBs
2. measured reliably
3. sale of goods
  1. rendering of services
    1. use by others of entity assets yielding interest, royalties and dividends
specifically excluded from IAS 18:
1. constructions contracts = IAS 11
  1. insurance contracts = IFRS 4
    1. leases = IAS 17
Recognition criteria
1. Sale of goods
  1. R
    1. I
      1. M
        P
        C
        costs incurred in measuring reliably
        not in line with CFW
        trying to match costs with revenues
        CFW = B/S view - match A/L
        probably EBs
        measured reliably
      2. involvement
      3. seller does not retain continuing managerial involvement or effective control over goods sold
    2. risks and rewards
2. Revenue from services
  1. M
    1. P
      1. C
        IGNORE risks/rewards + involvement
        use percentage complete method
        = total costs incurred to date / total estimated costs
3. Deferred payment terms
  1. future payment
    1. discount to PV to get consideration receivable
      1. deferred payment = financing transaction
        IAS 18 requires the seller to recognise BOTH sales revenue + interest income
        sales revenue = discounted PV of the future payment = "imputing interest"
  2. Multiple delivery contracts
    1. IAS 18 requires separation of transactions into components
New developments = IFRS 15
1. to provide a single rev. recog'n model applicable to a range of industries
  1. develop a model based on changes in specific A/L
    1. eliminate weaknesses + inconsistencies in existing concepts and standards
    2. converge IFRSs and US standards
2. "Revenue from Contracts with Customers
  1. effective 1st Jan 2017
ISSUES WITH REV RECOG'N
1. Buy/hold
  1. when does legal title + possession transfer?
    1. invoice? delivery?
  2. Inspection conditions
    1. minor = upon delivery
      1. major = inspected
    2. Consignment stock
      1. legal title not passed on until inventory sold on to 3rd party
        e.g. Audi -> Carcraft -> person
        risk of slow moving stock?
        when is it an asset of Carcraft?
        right to return?
        when to recognise sale?
      2. Prepaid orders
        on delivery
        Sale and leaseback
        true sale? OR loan?
        Subscription
        recognise income over period upon delivery
        Sale and repurchase
        = LOAN
        no revenue recognised - not a true sale
        Interest free credit
        recognise FV of consideration i.e. PV
        £100 in 1 year = £90.90 now (at 10%); remaining £9.10 = deferred interest income
        Support/service elements
        recognise immediate revenue now
        defer service and release over time as service is delivered
        e.g. mobile phone contract
        e.g. mobile phone handset
        Tuition fees
        recognised over period over which services are delivered i.e. amount per year
2. JUDGEMENT IS REQUIRED

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REVENUE RECOGNITION - IAS 18

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