SUMMARY ACCOUNTING THEORY

CHAPTER 9
REVENUE
LO 1 REVENUE DEFINED
 Revenue has to do with the gross increase in
the value of assets and capital, and that
increase eventually pertains to cash
 The physical flow involves the event of
producing and selling the firm’s output or
product
 The monetary flow involves the event of
increasing the calue of firm
 Revenue is directly related to the monetary
event of value increasing in the firm, which
arises out of production or sale of output
 ‘Revenue 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
increase in equity, other than increases
relating to contributions from equity
participants’ IAS 18/AASB 118 paragraph
7
 Examples of revenue are sales, fees,
interest, dividends, royalties, rent
Behavioural view of revenue
• Behavioural view of revenue suggests that
revenue (and profit) come about because
of something done by the firm
• All the firm’s activities form part of its
earning process
• Within the process, a point for recognising
revenue must be determined
LO 2 REVENUE RECOGNITION
Historical perspective
• During the nineteenth century, income
(profit) for a business was determined on
the basis of an increase in net worth
• The now familiar recognition or realisation
principle was not always a part of
standard accounting practice
• The increase in net worth view of income
was gradually supplanted by the notion
that income had to be ‘realised’
Criteria for revenue recognition
1. Devising
an idea

9. Receipt of 2. Making
cash purchases

3. Receipt of
8. Delivery orders
of goods to before
customers commencing
production

7. Receipt of
4.
orders after
Commencing
completing
production
production

5.
6.
Progressively
Completion
throughout
of production
production
 Recognition criteria are based on the
desire for both relevant and reliable
accounting information but, traditionally,
emphasis is placed on the latter. The
three criteria are:
1. Measurability of asset value
2. Existence of transaction
3. Substantial completion of the earning
process
LO 3 REVENUE MEASUREMENT
 Revenue recognition and measurement rules in IAS
18/AASB 118 Revenue, paragraph 14, 20, 29, 30
Sale of goods
14. Revenue from the sale of goods shall be recognised when
all the following conditions have been satisfied:
a. The entity has transferred to the buyer the significant risk
and rewards of the ownership of the goods
b. The entity retains neither continuing managerial
involvement to the degree usually associated with
ownership nor effective control over the goods sold
c. The amount of revenue can be measured reliably
d. It is probable that the economic benefits associated with
the transaction will flow to the entity
e. The cost incurred or to be incurred in respect of the
transaction can be measured reliably
Rendering of services
20. When the outcome of a transaction involving the
rendering 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 reposting date. The outcome of a transaction can be
estimated reliably when all the following conditions have
been satisfied
a. The amount of revenue can be measured reliably
b. It is probable that the economic benefits associated with
the transaction will flow to the entity
c. The stage of completion of the transaction at the
reposting date can be measured reliably
d. The cost incurred for the transaction and the costs to
complete the transaction can be measured reliably
Interest, royalties and dividends
29. Revenue arising from the use by others of entity assets
yielding interest, royalties and dividends shall be
recognised on the bases set out in paragraph 30 when:
a. It is probable that the economic benefits associated with
the transaction will flow to the entity
b. The amount of the revenue can be measured reliably
30. Revenue shall be recognised on the following bases:
a. Interest shall be recognised using the effective interest
method as set out in AASB 139, paragraph 9 and AG5-
AG8
b. Royalties shall be recognised on an accrual basis in
accordance with the substance of the relevant agreement
c. Dividend shall be recognised when the shareholder’s right
to receive payment is established
LO 4 CHALLENGE FOR STANDARD
SETTERS
Standard setters such as the IASB and FASB
have expressed the view of revenue transaction
are not well served by current guidance
literature. They have identified inconsistencies in
existing guidance and diversity in observed
practice. In addition, transactions have become
more complec requiring a review of present
guidance. Thus IASB and FASB have undertaken
a project which aims to provide a comprehensive
set of principles for revenue recognition and
measurement.
LO 5 ISSUES FOR AUDITORS
Auditors need to be sensitive to the risk
surrounding clients that are likely to be evaluated
on revenue growth and should gather direct
evidence to support their opinion that revenue is
not missted