Revenue

Definitions

Revenue is the gross inflow of economic benefits of the regular activities, when those inflows result in increases in equity, other than increases relating to contributions from investors. Revenue is income that is consequent from common activities of the firm.

The timing of recognition of revenue is a key issue of the standard. 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 firm, and the benefits can be measured.

Fair value

Fair value is the value for which an asset could be sold, or a liability extinguished, between willing, independent traders.

Measurement

Revenue should be measured at the fair value of the consideration received, or receivable. Trade discounts and volume rebates should be subtracted from revenue.

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.

SALE OF GOODS

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

1. The entity has transferred to the buyer the significant risks and rewards of ownership of the goods;

2. The entity retains neither continuing managerial involvement to the degree usually associated with ownership nor 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 entity; and

5. The costs incurred or to be incurred in respect of the transaction can be measured reliably.

RENDERING OF SERVICES

When the outcome of a transaction involving the rendering of services can be estimated reliably, revenue associated with the transaction shall be recognized by reference to the stage of completion of the transaction at the balance sheet date.

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. It is probable that the economic benefits associated with the transaction will flow to the entity;

3. The stage of completion of the transaction at the balance sheet date can be measured reliably; and

4. 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 recognized 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 recognized only to the extent of the expenses recognized that are recoverable.

INTEREST, ROYALTIES AND DIVIDENDS

Revenue shall be recognized on the following bases:

1. Interest shall be recognized using the effective interest method.

2. Royalties shall be recognized on an accrual basis in accordance with the substance of the relevant agreement; and

3. Dividends shall be recognized when the shareholder’s right to receive payment is established.