Sale of goods Includes goods produced/purchased for resale for example:
merchandise purchased by a retailer;
land and property held for resale.Rendering of services Typically involves performance of a contractually agreed task over an agreed period of time.
Use of entity assets yielding interest, royalties and dividends
Interest – charges for use of cash/cash equivalents or amounts due.
Royalties – charges for use of long-term assets (e.g. patents, trademarks, copyrights and computer software).
Dividends – distributions of profits to owners.
1.2 Definitions
Revenue – gross inflow of economic benefits arising in the course of ordinary
activities when those inflows result in increases in equity, other than
increases relating to contributions from equity participants. Commentary
Only income receivable by an entity on its own account is included in revenue. The collection of taxes (e.g. sales tax) does not result in increases in equity and so is excluded. Where a reporting entity acts as an agent (i.e. is not exposed to the significant risks and reward of acting as principal) amounts collected on behalf of the principal are not revenue – revenue is the commission.
Fair value – the price that would be received to sell an asset (or paid to transfer a
liability) in an orderly transaction between market participants at the measurement (e.g. reporting) date (IFRS 13).
1.3
Measurement of revenue
Revenue should be measured at the fair value of the consideration received or receivable (taking into account trade discounts and volume rebates allowed).
When consideration is deferred the difference between the fair value and the nominal amount of considerations is recognised as interest revenue (see also “instalment sales” later in this Session).
Illustration 1
On 1 January 2013 SFD sold furniture for $4,000 with three years interest-free credit. SFD’s cost of capital is 8%.
Revenue recognised in 2013 will be $3,175 ($4,000 × 1/(1.08)3. Also SFD will recognise interest income of $254 ($3,175 × 8%).
In 2014 interest income will be $274 ((3,175 + 254) × 8%).
And in 2015 the remaining interest income of $297 will be recognised.
This means that the full $4,000 will be recognised as revenue over the three years.
When goods or services are swapped revenue is only generated if the exchange is for dissimilar goods or services.
Commentary
Revenue is measured at the fair value of goods or services received adjusted by the amount of any cash or cash equivalents transferred. If this fair value cannot be measured reliably the fair value of goods or services given up is used.
Illustration 2
1. Accounting policies (extract)
Valuation methods, presentation and definitions Revenue (extract)
Revenue represents amounts received and receivable from third parties for goods supplied to the customers and for services rendered. Revenue from the sales of goods is recognised in the income statement at the moment when the significant risks and rewards of ownership of the goods have been transferred to the buyer, which is mainly upon shipment. It is measured at the list price applicable to a given distribution channel after deduction of all returns, sales taxes, pricing allowances and similar trade discounts. Payments made to the customers for commercial services received are expensed.
Illustration 3
Critical accounting estimates
Revenue recognition and presentation (extract)
Arrangements with multiple deliverables
In revenue arrangements including more than one deliverable, the deliverables are assigned to one or more separate units of accounting and the arrangement consideration is allocated to each unit of accounting based on its relative fair value.
Determining the fair value of each deliverable can require complex estimates due to the nature of the goods and services provided. The Group generally determines the fair value of individual elements based on prices at which the deliverable is regularly sold on a standalone basis after considering volume discounts where appropriate.
Vodafone Group plc Annual Report 2012
1.4 Revenue recognition
According to the “The Framework” income is recognised (in the statement of profit or loss) when there is a probable increase in a future economic benefit which can be measured reliably.
Commentary
Note that under The Framework’s definition of “income” there is no distinction between revenue and gains which arise in the ordinary course of activities. However such gains (which are often reported net of related expenses) are usually disclosed separately because the information is useful for decision-making purposes.
The recognition criteria in IAS 18:
are usually applied separately to each transaction: but may be applied:
to separately identifiable components in a transaction; or
to two or more linked transactions.
1.5
Sale of goods
1.5.1 Revenue recognition criteria
Significant risks and rewards of ownership are transferred to the buyer; Commentary
This usually coincides with transfer of legal title or passing of possession (e.g. retail sale) but see “critical events” in the operating cycle below.
Neither continuing managerial involvement nor effective control over goods sold are retained;
It is probable that economic benefits associated with the transaction will flow to entity; and
Costs (to be) incurred in respect of the transaction can be measured reliably. If legal title passes but risk and rewards are retained, no sale should be recognised. For example, where:
the entity retains obligation for unsatisfactory performance not covered by normal warranty provisions; or
the receipt of revenue is contingent on the buyer selling the goods on; or
goods are to be installed and the installation is a significant part of the contract and remains uncompleted; or
the buyer has the right to rescind and the seller is uncertain about the outcome. If legal title does not pass but the risks and rewards do then the transaction should be recognised as a sale.
Commentary
The transfer of risks and rewards is critical to the economic substance of transactions which is a key determinant for revenue recognition.