IAS 18 Revenue

Objective

The primary issue in accounting for revenue is determining when to recognise it. Revenue is recognised when it is probable that future economic benefits will flow to the entity and these benefits can be measured reliably. IAS 18 identifies the circumstances in which these criteria will be met and, therefore, revenue will be recognised.

Definition

Revenue is the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity that result in increases in equity (other than increases relating to contributions from equity participants, i.e. selling more share capital).

Measurement

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. 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.

Sale of goods

Revenue from the sale of goods shall be recognised when all the following conditions have been satisfied:

• the entity has transferred to the buyer the significant risks and rewards of ownership of the goods;
• the entity retains neither continuing managerial involvement associated with ownership nor effective 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; and
• the costs incurred or to be incurred in respect of the transaction can be measured reliably.

Provision of services

When the outcome of a transaction involving the provision of services can be estimated reliably, revenue associated with the transaction shall be recognised 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:

• 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 stage of completion of the transaction at the end of the reporting period can be measured reliably; and
• 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 recognised 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.

When the outcome of the transaction involving the rendering of services cannot be estimated reliably, revenue shall be recognised only to the extent of the expenses recognised that are recoverable (i.e. neither a profit nor a loss is recognised).

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