1. 18 Revenue Recognition Intermediate Accounting 14th Edition
Kieso, Weygandt, and Warfield

2. Learning Objectives Understand and describe different types of income
Understand the principles of accounting for revenue – MFRS 118
Understand the main criteria for revenue recognition
Recognise and measure diferent types of revenue
Manage revenue recognition issues
Sale of Goods
Rendering of Services
Interest, Royalties & Dividends

3. The Current Environment
Revenue recognition is a top fraud risk and regardless of the accounting rules followed (IFRS or U.S. GAAP), the risk or errors and inaccuracies in revenue reporting is significant.
Restatements for improper revenue recognition are relatively common and can lead to significant share price adjustments.

4. Definition
Revenue =
Gross inflow of economic benefits during the period
In the form of inflow or enhancement of assets or decreases of liabilities
Arising in the course of ordinary activities which result in
Increases in equity
Other than increases relating to contributions from equity participants.
LO 1 Apply the revenue recognition principle.

5. Principles of Accounting for Revenue
When do we recognize revenue?
when it is probable that future benefits will flow to the entity and
The benefits can be measured reliably.
LO 1 Apply the revenue recognition principle.

6. Main criteria for revenue recognition
Passing over of legal ownership
Exchange taken place
Earning process completed
LO 1 Apply the revenue recognition principle.

7. Point of recognition Point of delivery to customer  most common
During production (using percentage of completion method)
On completion of production
When cash is received – if there is serious doubt as to collectability of cash
After cash has been received (e.g. guaranteed refund policy)
LO 1 Apply the revenue recognition principle.

8. The Current Environment
Revenue Recognition Classified by Type of Transaction
Chapter 18
Chapter 18
Illustration 18-1
Type of Transaction
Sale of asset other than inventory
Sale of product from inventory
Rendering a service
Permitting use of an asset
Description of Revenue
Revenue from fees or services
Revenue from interest, rents, and royalties
Revenue from sales
Gain or loss on disposition
Timing of Revenue Recognition
Date of sale (date of delivery)
Services performed and billable
As time passes or assets are used
Date of sale or trade-in
LO 1 Apply the revenue recognition principle.

9. Sale of Goods Conditions for recognition:
Significant risks & rewards of ownership have been transferred from seller to buyer
e.g. possession of goods, legal title, goods subject to delivery & installation)
Seller does not retain continuing managerial involvement nor effective control over goods sold
e.g. goods sold subject to installation & installation is not complete)
LO 1 Apply the revenue recognition principle.

10. Sale of Goods Conditions for recognition:
Amount of revenue can be measured reliably
It is probable that economic benefits associated with the transaction will flow to the seller
Sometimes revenue may be uncollectible
Cost incurred/to be incurred can be measured reliably
Matching principle – cost of goods sold

11. Sale of Goods Examples:
Sale of fruits by vendor – revenue recognised when vendor passes over the fruits
Customer orders a pizza – recognised when pizza is delivered
Customer orders flowers for his wife, pays when flowers are ordered but requests that flowers are delivered in 3 days’ time – recognised when flowers are delivered
Newspapers are delivered every day in the morning, but vendor collects money at the end of the month – recognised daily when newspapers are delivered

12. Non-occurrence of a sale
Examples:
Intention to acquire by buyer
Goods manufactured on receiving an order
Goods shipped subject to conditions - revenue only recognised when buyer accepts delivery & installation/inspection is complete
Sale/return of goods – revenue is recognised when the approval period/time period for rejection has lapsed.
Consignment sales – revenue is recognised when consignee sells goods to third party
Sales under which goods are delivered only after the buyer makes the final payment in a series of instalments

13. Revenue Recognition at Point of Sale
Consignments
Manufacturers (or wholesalers) deliver goods but retain title to the goods until they are sold.
Consignor (manufacturer or wholesaler) ships merchandise to the consignee (dealer), who is to act as an agent for the consignor in selling the merchandise.
Consignor makes a profit on the sale.
Consignee makes a commission on the sale.

14. Rendering of Services Conditions for recognition:
By reference to the stage of completion at the reporting date when the outcome of the transaction can be estimated reliably.
This is when:
Amount of revenue can be measured reliably
Each party’s enforceable rights regarding the service to be provided and received by the parties
Consideration to be exchanged
Manner and terms of settlement
Probable that economic benefits will flow to the entity

15. Rendering of Services Conditions for recognition:
Stage of completion of transaction can be measured reliably (e.g. surveys of work performed, % services performed to date/total services, proportion of costs incurred to date/total costs)
Costs incurred for the transaction & the costs to complete can be measured reliably
If outcome cannot be reliably measured
Revenue recognized only to the extent expenses are recoverable
This is usually at the early stages of a transaction

16. Interest Conditions for recognition:
Recognised on a time basis using effective interest rate
E.g. On 1 April X5, Mr A deposited RM10,000 in a fixed deposit account. The interest was 10% p.a., payable at the end of the year.
As at 31 Dec X5, interest revenue = 10% x RM10,000 x 9/12 = RM750.

17. Royalties Conditions for recognition:
Recognised on an accrual basis in accordance with the substance of the relevant agreement.
E.g. Kalsom, a singer, has cut a new CD with a recording company. Royalty payable to Kalsom is RM10 for every CD sold. A total of 500,000 units has been produced but only 200,000 units have been sold. Therefore, the royalty income that can be recognised as revenue by Kalsom will be RM10 x 200,000 = RM2 million.

18. Dividend Conditions for recognition:
Recognised when the shareholders’ right to receive payment is established.
E.g. Mahani holds 100,000 ordinary shares in CEE Bhd. At the AGM held on 5 May X6, the directors proposed a dividend of 10% for the year X5. When can Mahani recognise her dividend income?
When it is declared, i.e on 5 May X6.

19. Recognition & measurement of Revenue
If uncertainty arises over the collectability of revenue recognized  uncollectible amount is recognized as an expense
Measured at fair value of the consideration received/receivable.
But what is fair?
For sale of goods – very easy (price agreed upon)
Matching concept
Revenue & expenses recognized simultaneously
Revenue cannot be recognized when expenses cannot be measured reliably  sale is recognized as a liability/unearned revenue

20. Disclosure What needs to be disclosed in the financial statements?
Accounting policies adopted for recognition, including methods to determine stage of completion (for rendering of services).
Amount of each significant category of revenue: sale of goods, rendering of services, interest, etc
Revenue amount arising from exchanges of goods or services included in each category.
LO 1 Apply the revenue recognition principle.

21. IFRS SELF-TEST QUESTION
Under IFRS, the revenue recognition principle indicates that revenue is recognized when:
the benefits can be measured reliably.
the sales transaction is initiated and completed.
it is probable the benefits will flow to the company.
the date of sale, date of delivery, and billing have all occurred.
I, II, and III.
II and III.
I and III.
I, II, III and IV.

22. Class exercise (10 mins) Decide when should revenue be recognised:
An LCD TV sells for RM10,000 with a one-year warranty. From past experience, 10% of LCD TVs develop a fault in the first year and the average cost of repair is RM sets were sold during the year.
Recognised revenue of RM10,000 when risks and rewards are transferred and make a provision for warranty based on the number of sets sold. 20 sets x10% x500 =RM1,000.

23. Class exercise (5 mins) Decide when should revenue be recognised:
Commission of RM2,000 was received by an agent for selling a 20-year life insurance policy.
Rendering of services.
Recognise RM2,000 on the sale of the policy.

24. Class exercise (10 mins) Decide when should revenue be recognised:
On 1 Dec, the company received RM800 cash from the sale of a TV whereby the customer had agreed to pay a 40% downpayment and the balance in 6 monthly instalments beginning 1 Jan X7.
Can recognise revenue of RM2,000 (full price of TV) when the goods are transferred to the customer. The balance of RM1,200 is receivable.

25. Class exercise (10 mins) Decide when should revenue be recognised:
Jacques, an architect, was commissioned in July to design a mansion for a total fee of RM2 million. He estimated that the total cost to be incurred will be RM1 million. As at the reporting date, he had completed 60% of the work. To date, Jacques has received RM800,000 from the client.
Revenue is recognised based on work done. As 60% work is completed, Jacques can recognise RM1.2 million as revenue and RM600,000 as cost.

26. Class exercise (10 mins) Decide when should revenue be recognised:
In July X6, Grapes Bhd sold 10,000 barrels of wine to Finance Bhd for RM3 million, with the firm understanding that Grapes will buy the wine back in July X7 for RM3.3 million.
For Grapes, it is not sales but borrowing.

27. Class exercise (10 mins)

28. Class exercise (10 mins) Computer company (HPS):
Revenue on sale can be recognised on delivery of the computer provided the installation is successful.
Revenue recognised should be RM1,200 (RM3,600 less RM2,400 i.e. internet service charge for 24 months).
Internet service provider (TMSYX):
The RM2,400 will initially be recognised as deferred credit and amortised over 24 months and recognised as income as service is provided.
The payment of RM400 can be charged as expenses when the contractor has provided the services.
Contractor (Dana):
Dana can recognise the RM400 on completion of the installation of the internet services.

29. Issues Multiple elements arrangement
Current standard has limited guidelines  different & inconsistent recognition practices
E.g. arrangement with variable considerations, licensing arrangements & warranties included in the service component

30. MFRS 15 – Revenue from Contracts with Customers
Effective 1 Jan 2018
Common model of accounting treatment, clearer guidance
Supersedes:
MFRS 111 Construction Contracts
MFRS 118 Revenue
IFRIC 13 Customer Loyalty Programmes
IFRIC 15 Agreements for Construction of Real Estate
IFRIC 18 Transfers of Assets from Customers
SIC 31 Revenue: Barter Transactions Involving Advertising Services

31. MFRS 15 – Revenue from Contracts with Customers
Revenue recognition:
Identify the contract with the customer
Identify performance obligations in the contract
Determine transaction price
Allocate the transaction price to the performance obligations in the contract
Recognise revenue when (or as) the entity satisfies a performance obligation

32. MFRS 15 – Revenue from Contracts with Customers
Contract is identified when:
Parties have approved the contract (in writing, orally, or other customary business practices) & are committed to perform their obligations
Entity can identify each party’s rights re: goods & services to be transferred
Entity can identify the payment terms for the goods or services to be transferred
The contract has commercial substance (i.e. risk, timing or amount of entity’s future cash flows are expected to change as a result of the contract)
It is probable that the entity will collect the consideration to which it will be entitled to in exchange for the goods & services that will be transferred to the customer.