IFRS/IAS Update

Md. Abu Khair Hasanul Hasif Sowdagar, FCMA, FCA

Senior Manager, Financial Controls, Standard Chartered Bank, Bangladesh

IAS 18 - Revenue
Abstract:
Accrual accounting is based on the matching of costs with the revenue they generate. It is crucially
important under this convention that we can establish the point at which revenue may be recongnised so
that the correct treatment can be applied to the related costs. For example, the costs of producing an item
of finished goods should be carried as an asset in the statement of financial position until such time as it is
sold; they should then be written off as a charge to the trading account. Which of these two treatments
should be applied cannot be decided until it is clear at what moment the sale of the item takes place.
The decision has a direct impact on profit since it would be unacceptable to recognize the profit on sale
had taken place in accordance with the criteria of revenue recognition.
IAS 18 governs the recognition of revenue in specific (common) types of transaction. Generally, recognition
should be when it is probable that future economic benefits will flow to the entity and when these benefits
can be measured reliably.

Probable flow Reliable

of economic measurement
benefit

Recognition

IAS 18 Revenue outlines the accounting requirements for when to recognise revenue from the sale of
goods, rendering of services, and for interest, royalties and dividends. Revenue is measured at the fair value
of the consideration received or receivable and recognised when prescribed conditions are met, which
depend on the nature of the revenue.
IAS 18 was reissued in December 1993 and is operative for periods beginning on or after 1 January 1995.

History of IAS 18:

Date Development & Comments
April 1981 Exposure Draft E20 Revenue Recognition
December 1982 IAS 18 Revenue Recognition
1 January 1984 Effective date of IAS 18 (1982)
May 1992 E41 Revenue Recognition
December 1993 IAS 18 Revenue Recognition (revised as part of the 'Comparability of Financial Statements' project)
1 January 1995 Effective date of IAS 18 (1993) Revenue Recognition
December 1998 Amended by IAS 39 Financial Instruments: Recognition and Measurement, effective 1 January 2001
16 April 2009 Appendix to IAS 18 amended for Annual Improvements to IFRSs 2009. It now provides guidance for
determining whether an entity is acting as a principal or as an agent.
1 January 2017 IAS 18 will be superseded by IFRS 15 Revenue from Contracts with Customers

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Related Interpretations:
IFRIC 18 Transfers of Assets from Customers
IFRIC 15 Agreements for the Construction of Real Estate
IFRIC 13 Customer Loyalty Programmes
IFRIC 12 Service Concession Arrangements
SIC-27 Evaluating the Substance of Transactions in the Legal Form of a Lease
SIC-31 Revenue - Barter Transactions Involving Advertising Services
Revenue: the gross inflow of economic benefits (cash, receivables, other assets) arising from the ordinary
operating activities of an entity (such as sales of goods, sales of services, interest, royalties, and dividends).
[IAS 18.7]

Measurement of Revenue:
Revenue should be measured at the fair value of the consideration received or receivable. [IAS 18.9] An
exchange for goods or services of a similar nature and value is not regarded as a transaction that generates
revenue. However, exchanges for dissimilar items are regarded as generating revenue. [IAS 18.12]
If the inflow of cash or cash equivalents is deferred, the fair value of the consideration receivable is less than
the nominal amount of cash and cash equivalents to be received, and discounting is appropriate. This would
occur, for instance, if the seller is providing interest-free credit to the buyer or is charging a below-market
rate of interest. Interest must be imputed based on market rates. [IAS 18.11]

Recognition of Revenue:
Recognition, as defined in the IASB Framework, means incorporating an item that meets the definition of
revenue (above) in the income statement when it meets the following criteria:
it is probable that any future economic benefit associated with the item of revenue will flow to the entity, and
the amount of revenue can be measured with reliability
IAS 18 provides guidance for recognising the following specific categories of revenue:

Sale of Goods:
Revenue arising from the sale of goods should be recognised when all of the following criteria have been
satisfied: [IAS 18.14]
the seller has transferred to the buyer the significant risks and rewards of ownership
the seller retains neither continuing managerial involvement to the degree usually 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 seller, and
the costs incurred or to be incurred in respect of the transaction can be measured reliably

Rendering of Services:
For revenue arising from the rendering of services, provided that all of the following criteria are met,
revenue should be recognised by reference to the stage of completion of the transaction at the balance
sheet date (the percentage-of-completion method): [IAS 18.20]
the amount of revenue can be measured reliably;
it is probable that the economic benefits will flow to the seller;
the stage of completion at the balance sheet date can be measured reliably; and
the costs incurred, or to be incurred, in respect of the transaction can be measured reliably.
When the above criteria are not met, revenue arising from the rendering of services should be recognised
only to the extent of the expenses recognised that are recoverable (a "cost-recovery approach". [IAS 18.26]

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Interest, Royalties, and Dividends:
For interest, royalties and dividends, provided that it is probable that the economic benefits will flow to the
enterprise and the amount of revenue can be measured reliably, revenue should be recognised as follows:
[IAS 18.29-30]
interest: using the effective interest method as set out in IAS 39
royalties: on an accruals basis in accordance with the substance of the relevant agreement
dividends: when the shareholder's right to receive payment is established

Disclosure [IAS 18.35]

accounting policy for recognising revenue
amount of each of the following types of revenue:
sale of goods
rendering of services
interest
royalties
dividends
within each of the above categories, the amount of revenue from exchanges of goods or services

Implementation Guidance
Appendix A to IAS 18 provides illustrative examples of how the above principles apply to
certain transactions.

Quick Links
Deloitte e-learning on IAS 18
IAS 18 - Items not added to the agenda
IFRS 15 'Revenue from Contracts with Customers'

IFRS 15 - Revenue from Contracts with Customers

IFRS 15 specifies how and when an IFRS reporter will recognise revenue as well as requiring such entities to
provide users of financial statements with more informative, relevant disclosures. The standard provides a single,
principles based five-step model to be applied to all contracts with customers.
IFRS 15 was issued in May 2014 and applies to an annual reporting period beginning on or after 1 January 2017.

Date Development Comments

June 2002 Project on revenue added to the IASB's agenda History of the project
19 December 2008 Discussion Paper Preliminary Views on Revenue Comment deadline 19 June 2009
Recognition in Contracts with Customers published
24 June 2010 Exposure Draft ED/2010/6 Revenue from Contracts Comment deadline 22 October 2010
with Customers published
14 November 2011 Exposure Draft ED/2011/6 Revenue from Contracts Comment deadline 13 March 2012
with Customers published (re-exposure)
28 May 2014 IFRS 15 Revenue from Contracts with Customers Effective for an entity's first annual IFRS financial
issued statements for periods beginning on or after 1
January 2017

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Superseded Standards
IFRS 15 replaces the following standards and interpretations:
IAS 11 Construction contracts
IAS 18 Revenue
IFRIC 13 Customer Loyalty Programmes
IFRIC 15 Agreements for the Construction of Real Estate
IFRIC 18 Transfers of Assets from Customers
SIC-31 Revenue - Barter Transactions Involving Advertising Services

Objective
The objective of IFRS 15 is to establish the principles that an entity shall apply to report useful information
to users of financial statements about the nature, amount, timing, and uncertainty of revenue and cash flows
arising from a contract with a customer. [IFRS 15:1] Application of the standard is mandatory for annual
reporting periods starting from 1 January 2017 onwards. Earlier application is permitted.

Scope
IFRS 15 Revenue from Contracts with Customers applies to all contracts with customers except for: leases
within the scope of IAS 17Leases; financial instruments and other contractual rights or obligations within
the scope of IFRS 9Financial Instruments, IFRS 10Consolidated Financial Statements, IFRS 11Joint
Arrangements, IAS 27Separate Financial Statements and IAS 28Investments in Associates and Joint Ventures;
insurance contracts within the scope of IFRS 4Insurance Contracts; and non-monetary exchanges between
entities in the same line of business to facilitate sales to customers or potential customers. [IFRS 15:5]
A contract with a customer may be partially within the scope of IFRS 15 and partially within the scope of
another standard. In that scenario: [IFRS 15:7]
if other standards specify how to separate and/or initially measure one or more parts of the
contract, then those separation and measurement requirements are applied first. The transaction
price is then reduced by the amounts that are initially measured under other standards;
if no other standard provides guidance on how to separate and/or initially measure one or more
parts of the contract, then IFRS 15 will be applied.

Key Definitions
Contract: An agreement between two or more parties that creates enforceable rights and obligations.
Customer: A party that has contracted with an entity to obtain goods or services that are an output of
the entity's ordinary activities in exchange for consideration.
Income: Increases in economic benefits during the accounting period in the form of inflows or
enhancements of assets or decreases of liabilities that result in an increase in equity, other than those
relating to contributions from equity participants.
Performance Obligation: A promise in a contract with a customer to transfer to the customer either:
a good or service (or a bundle of goods or services) that is distinct; or
a series of distinct goods or services that are substantially the same and that have the same pattern
of transfer to the customer.
Revenue: Income arising in the course of an entity's ordinary activities.
Transaction price: The amount of consideration to which an entity expects to be entitled in exchange for
transferring promised goods or services to a customer, excluding amounts collected on behalf of third
parties.

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