IAS 18 Summary Notes

IAS 18 Revenue

SCOPE

IAS 18 is applied in accounting for revenue arising from the following transactions and events:
(It does not deal with transactions and events covered specifically under any other IFRS.)
Goods include goods produced by the entity for the purpose of sale and goods
Sale of
purchased for resale, such as merchandise purchased by a retailer or land and
goods
other property held for resale.
Rendering The rendering of services typically involves the performance by the entity of a
of services contractually agreed task over an agreed period of time
Interest charges for the use of cash or cash equivalents or amounts due to the entity
charges for the use of long-term assets of the entity, for example, patents,
Royalties
trademarks, copyrights and computer software
distributions of profits to holders of equity investments in proportion to their holdings
Dividends
of a particular class of capital

DEFINITIONS

is the gross inflow of economic benefits during the period arising in the course of the
ordinary activities of an entity when those inflows result in increases in equity, other
than increases relating to contributions from equity participants.
Receipts on behalf of third parties In agency relationship
such as sales taxes, goods and the gross inflows of economic benefits include
Revenue
services taxes and value added taxes amounts collected on behalf of the principal
are not economic benefits which flow and which do not result in increases in equity
to the entity and do not result in for the entity. The amounts collected on
increases in equity. Therefore, they are behalf of the principal are not revenue.
excluded from revenue. Instead, revenue is the amount of commission

EXAMPLE 18A
Awais Limited revenue includes goods sold worth $ 8,000,000 to Touseef Limited on behalf of
Rehman Limited in consideration of 10% and remitted remaining 90% amount to Rehman Limited
which is included in cost of sales.

Required:
Pass the journal entry to correct the error in above, if any.

MEASUREMENT

Revenue shall be measured at the fair value of the consideration received or receivable
Deduct the amount of any trade discounts and volume rebates allowed by the
Discounts
entity.
Deferred The difference between the fair value and the nominal amount of the
consideration consideration is recognised as interest revenue.

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IAS 18 Summary Notes

EXAMPLE 18B
Nayyab Limited sold material with list price of $ 5,200 to Mehrsoe Limited and also allowed trade
discount of $ 200. However, Mehrose Limited had to pay $ 5,600 in total as they were allowed by
Nayyab Limited to take two months extra credit period on specific request.

Required:
Record the journal entries in the books of Nayyab Limited.

IDENTIFICATION

Apply recognition criteria

Separately Together
to identifiable components of a single to two or more transactions
transaction
If in substance the single transaction is When transactions are linked in such a way that he
resulting in two or more different types of commercial effect cannot be understood without
revenue reference to the series of transactions as a whole.
For example, when the selling price of a For example, an entity may sell goods and, at the
product includes an identifiable amount for same time, enter into a separate agreement to
subsequent servicing, that amount is repurchase the goods at a later date, thus negating
deferred and recognised as revenue over the substantive effect of the transaction; in such a
the period during which the service is case, the two transactions are dealt with together
performed.

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IAS 18 Summary Notes

RECOGNITION

CONDITIONS (All must be fulfilled)

Rendering
Sale of goods Interest Royalties Dividends
of services
the entity has
transferred to the buyer
the significant risks and the stage of dividends shall be
royalties shall
rewards of ownership (percentage) recognised when the
interest be recognised
of the goods completion shareholder’s right to
shall be on an accrual
the entity retains of the receive payment is
recognised basis in
neither continuing transaction established (i.e. when
using the accordance
managerial at the end of interim dividend is
effective with the
involvement to the the reporting declared by the directors
interest substance of
degree usually period can or final dividend is
method the relevant
associated with be measured declared by shareholders
agreement
ownership nor effective reliably in AGM)
control over the goods
sold
the amount of revenue can be measured reliably
it is probable that the economic benefits associated with the transaction will flow to the entity
the costs incurred or to be incurred
(cost to complete) in respect of the
transaction can be measured reliably
(for matching concept)

RISK AND REWARDS OF OWNERSHIP (SALE OF GOODS)

Insignificant Revenue in such cases is recognised at the time of sale provided the seller can
risk reliably estimate future returns and recognises a liability (usually a provision) for
retained returns based on previous experience and other relevant factors.

STAGE OF COMPLETION (RENDERING OF SERVICES)

(i) Survey of work performed
Usual
(ii) services performed to date / total services to be performed
methods
(iii) costs incurred to date / estimated total costs
For practical purposes, when services are performed by an indeterminate number of
Straight acts over a specified period of time, revenue is recognised on a straight-line basis
line basis over the specified period unless there is evidence that some other method better
represents the stage of completion.

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IAS 18 Summary Notes

SPECIAL CASES

‘BILL AND HOLD’ SALES

in which delivery is delayed at the buyer’s request but the buyer takes title and accepts billing.
Revenue is recognised when the buyer takes title, provided:
(a) it is probable that delivery will be made;
(b) the item is on hand, identified and ready for delivery to the buyer at the time the sale is
recognised;
(c) the buyer specifically acknowledges the deferred delivery instructions; and
(d) the usual payment terms apply.

Revenue is not recognised when there is simply an intention to acquire or manufacture the goods
in time for delivery

GOODS SHIPPED SUBJECT TO CONDITIONS

Revenue is normally recognised when the buyer accepts delivery, and installation
and inspection are complete.

However, revenue is recognised immediately upon the buyer’s acceptance of

Installation
delivery when:
and
(i) the installation process is simple in nature, for example the installation of a
inspection
factory tested television receiver which only requires unpacking and
connection of power and antennae; or
(ii) the inspection is performed only for purposes of final determination of contract
prices, for example, shipments of iron ore, sugar or soya beans.
On approval On approval – the buyer has a limited right of return
– the buyer If there is uncertainty about the possibility of return, revenue is recognised when
has a limited the shipment has been formally accepted by the buyer or the goods have been
right of delivered and the time period for rejection has elapsed.
return
Consignment sales under which the recipient (buyer) undertakes to sell the
Consignment goods on behalf of the shipper (seller)
sales Revenue is recognised by the shipper when the goods are sold by the recipient to
a third party.
Cash on Revenue is recognised when delivery is made and cash is received by the seller
delivery or its agent.
sales

LAY AWAY SALES

under which the goods are delivered only when the buyer makes the final payment in a series of
instalments.
Revenue from such sales is recognised when the goods are delivered.

However, when experience indicates that most such sales are consummated, revenue may be
recognised when a significant deposit is received provided the goods are on hand, identified and
ready for delivery to the buyer.

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IAS 18 Summary Notes

FUTURE GOODS
Orders when payment (or partial payment) is received in advance of delivery for goods not
presently held in inventory, for example, the goods are still to be manufactured or will be delivered
directly to the customer from a third party.
Revenue is recognised when the goods are delivered to the buyer.

SALE AND REPURCHASE AGREEMENTS

under which the seller concurrently agrees to repurchase the same goods at a later date, or when
the seller has a call option to repurchase, or the buyer has a put option to require the repurchase,
by the seller, of the goods.
The terms of the agreement need to be analysed to ascertain whether, in substance, the seller
has transferred the risks and rewards of ownership to the buyer and hence revenue is recognised.

When the seller has retained the risks and rewards of ownership, even though legal title has been
transferred, the transaction is a financing arrangement and does not give rise to revenue.

SALES TO INTERMEDIATE PARTIES

such as distributors, dealers or others for resale
Revenue from such sales is generally recognised when the risks and rewards of ownership have
passed.

However, when the buyer is acting, in substance, as an agent, the sale is treated as a
consignment sale.

INSTALMENT SALES
under which the consideration is receivable in instalments
Revenue attributable to the sales price, exclusive of interest, is recognised at the
Recognise
date of sale.
The sale price is the present value of the consideration, determined by discounting
Sale price
the instalments receivable at the imputed rate of interest.
Interest The interest element is recognised as revenue as it is earned, using the effective
element interest method.

INSTALLATION FEES
Installation fees are recognised as revenue by reference to the stage of completion of the
installation, unless they are incidental to the sale of a product, in which case they are recognised
when the goods are sold.

SERVICING FEES INCLUDED IN THE PRICE OF THE PRODUCT

(for example, after sales support and product enhancement on the sale of software)
That amount is deferred and recognised as revenue over the period during which the service is
performed.

The amount deferred is that which will cover the expected costs of the services under the
agreement, together with a reasonable profit on those services.

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ADVERTISING COMMISSIONS
Media commissions are recognised when the related advertisement or commercial appears
before the public.

Production commissions are recognised by reference to the stage of completion of the project.

ADMISSION FEES
Revenue from artistic performances, banquets and other special events is recognised when the
event takes place.

When a subscription to a number of events is sold, the fee is allocated to each event on a basis
which reflects the extent to which services are performed at each event.

TUITION FEES
Revenue is recognised over the period of instruction.

FEES FROM THE DEVELOPMENT OF CUSTOMISED SOFTWARE

Fees from the development of customised software are recognised as revenue by reference to the
stage of completion of the development, including completion of services provided for post-
delivery service support.

EXAMPLE 18C
Sarmad Uzair Limited is a retailer of washing machines. The company sells 100 washing
machines for $ 5,000 each during the first week of the year. Each deal includes one year’s free
credit, valued at $ 250 per machine and a three-year after sales service valued at $ 100 per
machine per year.

Required:
How the above revenue should be recognised in income statement of year 1.

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ANSWER 18A
The journal entry:
Date Particulars Dr. Rs Cr. Rs
xx.xx.xx Revenue 8,000,000
Commission income 800,000
Cost of sales 7,200,000
(rectifying entry to record agency sales)

ANSWER 18B
The journal entries are:
Date Particulars Dr. $ Cr. $
now Mehrose Limited 5,000
Sales 5,000

On due Mehrose Limited 600

date Interest income 600

On Cash 5,600
payment Mehrose Limited 5,600

ANSWER 18C

$
Sale of goods – washing machines [$ 5,000 – ($ 100 x 3) – $ 250] x 100 units 445,000
Services – after sales services $ 100 x 100 units 10,000
Interest $ 250 x 100 units 25,000
Total revenue 480,000

Dated: 20 August 2016

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