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Recognition
The Framework and IFRS set out income and revenue
recognition criteria. The Framework proposes that
income is recognised (earned) when an increase in
future benefits related to an increase in an asset
or decrease of a liability have arisen and can be
measured reliably [F.92-93]. Income is normally
recognised in the income statement when earned;
however, under certain circumstances it is: deferred
in equity; recognised as part of the cost of an
asset; or presented on a net basis together with
a related expense .
Revenue is usually recognised only when the entity
has fulfilled its obligations such as providing
goods or services that do not give rise to residual
obligations . Many sale transactions
however are structured to include potential obligations.
These obligations do not necessarily preclude the
recognition of revenue . For example, an entity may agree to
include a warranty or subsequent servicing provision
in a sales agreement. The entity will usually recognise
revenue for the sale of goods and/or services and
simultaneously recognise an expense and liability
for an estimate of the amount to meet any potential
obligation under the warranty arrangement [IAS18R.19]
.
Specific recognition criteria - sale of goods, rendering of services, interest, royalties and dividends, government grants
IFRS include criteria for revenue recognition that
are more specific than the Framework. These standards
set out revenue recognition criteria for each of:
the sale of goods; the rendering of services; interest,
royalties and dividends; and government grants.
The criteria common to each of these are: the probability
that future economic benefits associated with the
transaction will flow to the entity; and that the
revenue can be measured reliably [IAS18R.14,20,29].
IFRS prescribe additional recognition criteria
for the following sources of revenue. Revenue should
be recognised on:
| a) |
the sale of goods, when the entity has
transferred significant risks and rewards of
ownership to the buyer and has relinquished
managerial involvement and effective control
over the goods and when the costs incurred can
be measured reliably [IAS18R.14(a),(b),(e)]
; |
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| b) |
the rendering of services, when the stage
of completion of the transaction can be measured
reliably at the balance sheet date [IAS18R.20(c)]
; |
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| c) |
interest income, on a basis that takes
account of the duration of the financial instrument
and the effective yield on the asset [IAS18R.30(a),
IAS39R.9] ;
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| d) |
royalties, on an accrual basis in accordance
with the substance of the agreement [IAS18R.30(b)]
; |
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| e) |
dividends, when the entity's right to receive
payment is established [IAS18R.30(c)] ; |
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| f) |
government grants, when the conditions
for their receipt have been met and there is
reasonable assurance that the grant will be
received [IAS20R.7]. Revenue-based grants are
recognised on a basis that matches the expenditure
they are intended to compensate, capital-based
grants are recognised to match the depreciation
charge on the asset to which the grants relate
[IAS20R.12,16-17] . |
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Deferral of revenue recognition
Revenue and gains are usually recognised (either
in income or equity) when the recognition criteria
are met [F.92-93]. There are circumstances in which
an entity might wish to defer the recognition of
revenue; however, revenue should not be deferred
in the balance sheet when it does not meet the definition
of a liability .
IFRS specifically require that, for certain items,
entities should defer revenue and gains over a prescribed
period. For example:
| a) |
a lessee should recognise the benefit
of a lease incentive over the lease period as
a reduction of the lease expense [SIC-15.3-6];
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| b) |
a gain on a sale and leaseback transaction
classified as a finance lease should be deferred
and amortised over the lease term [IAS17R.59]; |
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| c) |
an actuarial gain arising from the measurement
of a defined benefit liability should be recognised
immediately or amortised over a prescribed period
[IAS19R.61(d),92-95]; and |
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| d) |
fair value gains on financial instruments
designated as cash flow hedges deferred and
amortised over a period concurrent with the
earnings recognition of the hedged item [IAS39R.95-101]. |
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Measurement
Revenue should be measured at the fair value of the
consideration received or receivable [IAS18R.7-10].
The consideration's fair value should be determined
by discounting future receipts if the cash or cash
inflow is deferred [IAS18R.7-11] .
Income from most transactions can be measured in
relation to an inflow of cash or cash equivalents,
or an agreed amount under a sale agreement [IAS18R.10-11].
IFRS provide measurement guidance for other more
complex transactions. These include:
| a) |
revenue from a barter transaction [IAS18R.12]
[SIC-31.5] [IAS 16R.23-26]; |
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| b) |
a gain on transactions denominated in
a foreign currency [IAS21R.28-34]; |
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| c) |
a gain arising from the restatement of
financial statements to current purchasing power
[IAS29R.27-28,31]; |
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| d) |
revenue arising from the investment in
a lease [IAS17R.36-39]; and |
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| e) |
interest revenue [IAS18R.29-34, IAS39R.9]. |
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Presentation
Revenue arising from trading and other operating
activities should usually be recognised in the income
statement on a gross basis when it is earned [F.92-93]. There are limited circumstances when income
and expense can be offset. The three examples included
in IAS 1 are revenues from incidental activities,
gains and losses from disposals of non-current assets
and contractual reimbursements of expenditures that
relate to provisions. Offsetting is prohibited in
other circumstances unless specifically permitted
or required by an IFRS [IAS1R.32].
IFRS do however specify certain exceptions to recognition
in the income statement:
Offset against the carrying amount of an asset
or liability
| a) |
distributions received from an investee
should reduce the carrying amount of an investment
accounted for under the equity method of accounting
[IAS28.11] ; and |
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| b) |
gains on financial instruments used to
hedge a forecast transaction. [IAS39R.98(b)]
. |
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Presented in equity
| a) |
consideration from the sale,
issuance or cancellation of treasury shares
should be presented as a change in equity [IAS
32R.33] . |
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| b) |
unrealised gains that result
from certain transactions should be presented
in equity (and subsequently recycled to the
income statement when realised). These are: |
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i) exchange gains on long-term
loans denominated either in the functional currency
of the reporting entity or foreign operation,
which form part of the net investment in a foreign
operation [IAS21R.33];
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ii) fair value gains on property, plant and
equipment [IAS16R.39]; |
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iii) foreign exchange translation gains [IAS21R.39(c)]; and
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iv) fair value gains on financial instruments
designated as cash flow hedges [IAS39R.95-101]. |
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Additionally, fair value gains on certain financial
assets (available-for-sale securities) should be
presented in equity [IAS39R.55(b)].
Disclosure
There are a number of disclosure requirements for
various items of revenue and gains set out in IFRS.
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