IAS 18 Revenue Recognition Mr. BarryA-level Accounting Year 13

Accrual accounting concept Dictates – (1) when transactions with third parties should be recognised and Determines – (2) the accounting periods in which they should be incorporated into the financial statements Under this concept cash receipts from customers and payments to creditors are replaced by revenue and expenses respectively Mr. BarryA-level Accounting Year 13

Accrual accounting concept Revenues and Expenses are derived by adjusting the realised operating cash flows to take account of business trading activity that has occurred during the accounting period but has not been converted into cash receipts or payments by the end of the period Adjust for debtors, creditors, accruals and prepayments Mr. BarryA-level Accounting Year 13

Accrual accounting concept The accounting profession generally supports the view expressed by the Financial Accounting Standards Board (FASB) in the USA that: – accrual accounting provides a better indication of an enterprise’s present and continuing ability to generate favourable cash flows than information limited to the financial aspects of cash receipts and payments Mr. BarryA-level Accounting Year 13

IAS 18 Revenue IASC set out revenue recognition criteria in IAS 18 Revenue (January 1995) in an attempt to identify when performance was sufficient to warrant inclusion in the revenue for the period It stated the following in relation to revenue recognition: Mr. BarryA-level Accounting Year 13

Criteria Significant risks/rewards of ownership transferred to the buyer No continuing involvement nor control associated with ownership Amount of revenue can be measured reliably Probable that economic benefits from the transaction will flow to the entity Costs incurred or stage of completion can be measured reliably Mr. BarryA-level Accounting Year 13

IAS 18 Revenue In a transaction involving the sale of goods, performance should be regarded as being achieved when the following conditions have been fulfilled: – The seller of the goods has transferred to the buyer the significant risks and rewards of ownership, in that all significant acts have been completed and the seller retains no continuing managerial involvement in, or effective control of, the goods transferred; and – The enterprise has no continuing managerial involvement, no longer has effective control over the goods Mr. BarryA-level Accounting Year 13

IAS 18 Revenue – No significant uncertainty exists regarding: 1)The consideration that will be derived from the sale of the goods; 2)The associated costs incurred or to be incurred in producing or purchasing the goods; 3)The extent to which the goods are returned. Mr. BarryA-level Accounting Year 13

Critical Event Revenue is recognised when it is likely that the economic benefits from the transaction will occur and can be measured The Realisation concept is underlying this IAS e.g. Revenue is recognised when it is earned Mr. BarryA-level Accounting Year 13