MFRS 118

REVENUE
Lesson outcome

 At the end of this lesson, student should be

able to:
1.Define revenue and identify different types
of revenue.
2.Explain the revenue recognition criteria for:
1. Sale of goods
2. Provision of services
3. Interest, Royalties and dividends

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Lesson outcome
3.Explain the measurement of revenue.
4.Explain the timing of revenue recognition for different types of revenue
given in the Appendix of MFRS 118.
 Bill and hold sales
 Goods shipped subject to conditions
 Lay and away sales
 Orders when payment(or partial payment) is received in advance of delivery for
goods not presently held in inventory.
 Sales to immediate parties
 Subscriptions
 Installment sales
 Installation fees
 Advertising commission
 Insurance agency commission
5.State the disclosure requirements of MFRS118 on revenue.
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Definition

 Revenue
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

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Measurement of Revenue
 Revenue should be measured at the
fair value of the consideration received
or receivable

 Fair value -Amount for which an asset

could be exchanged, or a liability
settled, between knowledgeable, willing
parties in an arm’s length transaction

 Consideration-In the form of cash and

cash equivalents
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Sale of Goods
 Revenue recognition criteria:
1. The seller has transferred to the buyer
significant risks and rewards of ownership;
2. The seller does not retains continuing
managerial involvement to the degree usually
associated with ownership or effective control
over the goods sold.
3. The amount of revenue can be measured
reliably
4. It is probable that the economic benefits
associated with the transaction will flow to the
seller.
5. The costs incurred or to be incurred in respect of
the transaction can be measured reliably 6
Examples of Sale of Goods
1. Sale of fruits by a fruit vendor
 When vendor hands over the fruits to the buyer the risks
and rewards are transferred to the buyer. The fruit seller
can recognised the sale at that point.
2. Customer orders a pizza over the telephone
 Sale takes place when the pizza is delivered.
3. Customer orders flowers, pays for the flowers
when the flowers are ordered but requests that the
flowers be delivered in three days’ time.
 The florist can recognise revenue when the flowers are
delivered.
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Examples of Sale of Goods
4. Newspapers are delivered in the morning but
the vendor collects money at the end of the
month.
 Sale revenue is recognised daily when newspapers are
delivered.

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Rendering of Services

 Revenue recognition criteria:

 Recognized by reference to the stage of

completion at the reporting date when the
outcome of a transaction can be estimated
reliably.

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 Rendering of Services
• The outcome of a transaction can be
estimated reliably when all the following
conditions are satisfied:
1. The amount of revenue can be measured
reliably
2. Probable economic benefits associated with
the transaction will flow to the enterprise
3. Stage of completion of the transaction at the
reporting date can be measured reliably
4. Costs incurred and costs to complete the
transaction can be measured reliably
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 Rendering of Services
• Services rendered can be:
• short-term or
• Long term contracts
• Example short term:
• When a patient visits the doctor for consultation.
• Revenue for the doctor can be recognised as soon as the
consultation is over.
• Example long-term contracts:
• Project evaluation carried out by consultant and
construction of an asset for the customer.
• Long-term contracts take more than one accounting period
to complete.

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Rendering of Services

 Example 1
 ACE entered into a contract to construct a house for Mr
Man on 1 April x4. The contract price was agreed at
RM5 million.ACE estimated that it would take 3 years to
complete the project and the cost of building the house
would be RM4 million. In year 4, ACE completed part of
the project and incurred a cost of RM1 million. By the
end of year 4, ACE had received RM800,000 from Mr
Man.
 How much could ACE recognise as revenue for year 4?

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Rendering of Services
 Solution
 How much could ACE recognise as revenue for year 4?
 Revenue recognise as a proportion of the work completed.
 The basis used is the proportion of cost to date bears to total cost.
Cost to date x Total Revenue
Total estimated cost
= RM1 million x RM5 million = RM1.25 million
RM4 million
 The revenue recognised for year 4 is RM1.25 million and not RM800,000
cash received.
 The difference between (RM1.25million-800,000)= RM450,000 is due
from customer report as current asset.
 If the customer pays RM1.5 million, then there is a liability of RM250,000

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Interest, Royalties and
Dividends

 Revenue arising on the assets owned

by an entity but used by the others.
 These are recognised when:-
1.It is probable that the economic
benefits associated with the transaction
will flow to the entity; and
2.The amount of revenue can be
measured reliably

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Bases of Recognition –Interest

• Interest should be recognized on

time proportion basis using
effective interest rate.
• Example 2
• On 1 April x5, Mr Boyz deposited
RM100,000 in a Maybank fixed deposit
account. The interest was 10% p.a
payable at the end of each year.
• How much revenue can Mr Boyz
recognise as interest income?
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Bases of Recognition –Interest

• Solution
• At 31 December x5, the interest earned
by Mr Boyz will be:-
• RM100,000 x 10% x 9/12 = RM750.

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Bases of Recognition-Royalties

• Royalties should be recognized on an

accrual basis in accordance with the
substance of the relevant agreement.
• Example 4
• Sri Kalsom a singer, has cut a new compact
disc with a recording company. Royalty payable
to her is RM10 for every compact disc sold. A
total of 500,000 units has been produced but
only 200,000 units have been sold.
• Therefore, the royalty income that can be
recognised as revenue by Sri Kalsom will be
RM10 x 200,000 = RM2 million.
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Bases of Recognition-Dividends

• Dividends should be recognized

when the shareholders’ right to
receive payment is established
• Example 5

• Puan Mahani holds 100,000 ordinary shares in

CEE Bhd. At the annual general meeting held
on 5 May x6, the directors of CEE Bhd
proposed a dividend of 10% for the year x5.
• When can Mahani recognise her dividend
income?
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Bases of Recognition-Dividends

• Solution
• Example 5
• When can Mahani recognise her dividend
income?
• Puan Mahani has the right to receive the
dividend only when it is declared.
• Therefore, she can recognise the dividend
revenue on 5 May x6.

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Disclosure Requirement

• The following are to be disclosed:

1. Accounting policies adopted for the
recognition of revenue including methods
determine stage of completion of transactions
involving the rendering of services.
2. Amount of each significant category of
revenue recognised during the period: sale of
goods, rendering of services, interest,
royalties or dividends
3. Amount of revenue arising from exchanges of
goods or services included in each category.

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Appendix to MFRS 118

 Sale of goods
1. ‘Bill and hold’ sales – in which delivery is
delayed at the buyer’s request but the buyer
takes title and accept billing.
 Revenue is recognised when the buyer takes
title, provided:
1. It is probable that delivery is made
2. The item is on hand, identified and ready for delivery to
the buyer at the time the sale is recognised.
3. The buyer specifically acknowledges the deferred delivery
instructions and
4. The usual payment terms apply.
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Appendix to MFRS 118
 Sale of goods
 2. Goods ship subject to conditions
 Revenue is recognised when the buyer accepts
delivery and installation and inspection are complete.
 3. Sale or return
 Revenue is recognised when the approval period or
time period for rejection has elapsed.
 If possibility of return by customers is uncertain,
revenue can be recognised on delivery.

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Appendix to MFRS 118
 Sale of goods
 4. Consignment sales
 The vendor will recognise revenue when the
consignee sells the goods to a third party.
 However, the substance of the terms has to be
applied.
 For example, if the risks are with the consignee the
the consignor recognises revenue on delivery of the
goods to consignee.

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Appendix to MFRS 118
 Sale of goods
 5. Lay away sales under which the goods are
delivered only when the buyer makes the final
payment in a series of installments.
 Generally, revenue is recognised when the goods are
delivered.
 However, when experience indicates that the customer
will fulfill the terms, 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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Summary

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Question 1
 ACE received an order for its products from one of
its major customers. A deposit of RM50,000 was
received when the order was placed and the
balance RM250,000 will be paid to ACE on delivery
of the goods.
 When should revenue be recognised?
A. When the order was placed
B. On delivery of the goods to the customer
C. When the goods are manufactured and packed for
delivery.
D. When the goods are loaded on the delivery trucks.
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Question 2
 XYZ manufactures and sells product SSS. It
offers a refund to its customers on goods
purchased within one month of the sales if the
customers are dissatisfied with the product.
 When should XYZ recognise the sales?
A.After one month
B.On sale of the goods
C.Only if the goods are not returned
D.An estimated amount of sale
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Question 3
 An entity that sells electrical products received a
deposit of RM1,000 on delivery of refrigerator and
the balance will be received in six montly
instalments of RM200 per instalment.
 When is revenue recognised?
A.When all the instalments are received
B.Recognise as cash is received
C.When the refrigerator was delivered to the customer
D.When the deposit was received

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Question 4
 Ros invested RM1 million in a financial product that pays
an annual interest of 4% and a premium of 10% when
the investment is redeemed in four years’ time. The
effective interest rate is 6%. How much interest should
Ros recognise in the first year?
A. RM40,000= 4% x RM1 million.
B. RM140,000 = Interest received plus premium
C. RM60,000 =Effective interest rate at 6% x RM1 million
D. RM65,000 = RM40,000 interest received plus ¼ of
premium of RM100,000.

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Question 5
 Ben received RM2,400 for the next 12 months’
subscription of a monthly magazine. How should
the subscription be recognised?
A.On receipt of RM2,400
B.At the end of 12 months when all the magazine
are delivered.
C.Recognise all receipts at the end of the year.
D.On a straight-line basis over 12 months.

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Question 6
 Raja Perfomers puts up artistic performances.
When should they recognise revenue from the
ticket sold?
A.On sale of the tickets
B.When the audience registers for the show
C.When the event takes place
D.When cash is received from the sale of the
tickets.

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