Revenues are a highly important aspect of a company’s financial statement and drive perceived performance and subsequently the stock price. How these are measured is of great importance as if they are done improperly it can create a false impression of company performance.
This standard applies to the sale of goods, services, as well as interest, royalties, and dividends. Certain conditions must be met for each of these specific transactions in order for revenue to properly be recognized in the accounting period. For example, the sale of a good cannot be recognized if the good has not transferred ownership yet. Another example would be that a dividend revenue cannot be recognized until the shareholder’s ownership of that dividend has been established.
For services you can use the percentage of completion method. Must disclose how you calculate it.
IAS 18 required disclosure of policies for revenue recognition, which are dependent on the business of the company.
IAS 18 revenue recognition criteria:
All five of the following must be met
+Significant Risks and Rewards Transfer
+Management and Effective Control Transfer
+Revenue is Reliably Estimable
+Transaction Costs are Reliably Estimable
+Collectability is Probable
When selling goods, the following shipping terms define when revenue can be recognized.
FOB Shipping Point – Goods transfer ownership at the time of shipment, eg. they are put on the loading dock
FOB Destination – Goods transfer ownership at the time of delivery to customer
Revenue Recognition Criteria for Rendering Services:
+Receive Economic Benefits
+Measure Transaction Costs
+Measure Stage of Completion
Entities must disclose the revenue they recognize for each significant category:
+Sale of Goods
+Rendering of Services
IAS are principles based standards, rather than strict rules based standards that govern international accounting. IAS standards differ from IFRS standards in that they were introduced prior to 2001, whereas IFRS were produced after this date by the IASB, or the International Accounting Standards Board. When determining the hierarchy of these, the IAS is considered to be the building blocks in which the newer and more relevant IFRS are founded and therefore IFRS is more authoritative when these conflict.
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