IAS 18: REVENUE

Learning Objectives
By the end of this session, you should be able to :
Define the term revenue
Explain how revenue is measured
Discuss the criteria which must be met when recognising
revenue arising from the sale of goods.
Discuss the criteria which must be met when recognising
revenue arising from the rendering of service.
Discuss the criteria which must be met when recognising
revenue arising from interest, royalties and dividends

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 Introduction
Accruals accounting is based on the matching of costs
with the revenue they generate.
It is important that under this convention, that entities
should establish at which point revenue may be
recognised;
This has a direct impact on profit since under the
prudence concept it would be unacceptable to
recognise the profit on sale until a sale has taken place
in accordance with the criteria of revenue recognition.

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 Objectives
The objective of this Standard is to:
 prescribe the accounting treatment of revenue arising from
certain types of transactions and events.
The primary issue in accounting for revenue is determining
when to recognise revenue :
Revenue is recognised when it is probable that future economic
benefits will flow to the entity and these benefits can be
measured reliably.
This Standard identifies the circumstances in which these
criteria will be met and, therefore, revenue will be recognised.
It also provides practical guidance on the application of these
criteria.

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 Scope
This Standard shall be applied in accounting for
revenue arising from the following transactions and
events:
(a) the sale of goods;
(b) the rendering of services; and
(c) the use by others of entity assets yielding interest,
royalties and dividends.

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 Exemptions (1)
This Standard does not deal with revenue arising from:
(a) lease agreements (see IAS 17 Leases);
(b) dividends arising from investments which are
accounted for under the equity method (see IAS 28
Investments in Associates);
(c) insurance contracts within the scope of IFRS 4
Insurance Contracts;
(d) changes in the fair value of financial assets and
financial liabilities or their disposal (see IAS 39
Financial Instruments: Recognition and Measurement);

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 Exemptions (2)
This Standard does not deal with revenue arising from:
(e) changes in the value of other current assets;
(f) initial recognition and from changes in the fair value
of biological assets related to agricultural activity (see
IAS 41 Agriculture);
(g) initial recognition of agricultural produce (see IAS
41); and
(h) the extraction of mineral ores

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 Definitions – IAS 18
Revenue:
The gross inflow of economic benefits during the period
arising in the course of the ordinary activities of an
enterprise when those inflows result in increases in
equity, other than increases relating to contributions from
equity participants.
Fair Value:
The amount for which an asset could be exchanged, or a
liability settled between knowledgeable, willing parties
in an arm’s length transaction.

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 General Definitions
Interest:
The charge for the use of cash or cash equivalents or
amounts due to the entity.
Royalties:
Charges for the use of non-current assets of the entity ,
e.g. Patents, computer software and trademarks
Dividends:
Distributions of profit to holders of equity investments,
in proportion with their holdings , of each relevant class
of capital.

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 Measurement of Revenue
When a transaction takes place, the amount of revenue
is usually decided by the agreement between buyer
and the seller.
The revenue is measured as the fair value of the
consideration received and should take into account of
any trade discounts and volume rebates.
Revenue does not include sales taxes, value added
taxes or goods and services taxes which are collected
for third parties. Why ?

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 Identification of Transactions
Each transaction can be looked at as a whole.
When transactions are complicated, it may be
necessary to break the transactions down into
component parts:
E.g. Transfer of goods and the provision of future
servicing.

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 Sale of Goods
Revenue from the sale of goods should only be
recognised when all these conditions are satisfied:
i. The entity has transferred the significant risks and rewards
of ownership to the buyer.
ii. The entity has no continuing managerial involvement to
the degree usually associated with ownership, and no
longer has effective control over the goods sold.
iii. The amount of the revenue can be measured reliably.
iv. It is probable that the economic benefits associated with
the transaction will flow to the enterprise.
v. The cost incurred in respect of the transaction can be
measured reliably.

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 Rendering of Service
When the outcome of a transaction involving the rendering of
service can be estimated reliably, the associated revenue should
be recognised to the stage of completion of the transaction at
the year end.
The outcome of a transaction can be estimated reliably when all
these conditions are satisfied:
The amount of the 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 year end can be
measured reliably
The costs incurred for the transaction and the costs to complete the
transaction can be measured reliably.

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 Interest , Royalties and Dividends
Revenue should be recognised when:
It is probable that the economic benefits associated with
the transaction will flow to the enterprise and
The amount of the revenue can be measured reliably
The revenue is recognised on the following basis:
Interest : recognised on a time proportion basis that takes
into account the effective yield on the asset.
Royalties : recognised on an accruals basis in accordance
with the substance of the relevant agreement
Dividends: recognised when the shareholders' right to
receive payment is established.

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 Disclosure
The accounting policies adopted for the recognition of
revenue, including the methods used to determine the stage of
completion of transactions involving the rendering of service.
The amount of significant category of revenue recognised
during the period including revenue arising from:
The sale of goods
Rendering of service
Interest
Royalties
Dividends
The amount of revenue arising from the exchanges of goods
or services included in each significant category of revenue.

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