1. GODFREY HODGSON HOLMES TARCA
CHAPTER 9
REVENUE

2. Revenue defined
Income is increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants.
AASB Framework

3. Revenue defined Revenue represents a physical and a monetary flow
Revenue is an inflow of economic benefits
Revenue forms part of income – which also includes gains – and arises in the course of ordinary activities
Examples are sales, fees, interest, dividends, royalties and rents

4. Behavioural view of revenue
Revenues are the result of firm activity
Net accomplishment of firm
revenue = accomplishment
expense = effort
matching results in profit = net accomplishment
A point of recognition must be determined
critical event
accrual throughout earnings process

5. Revenue recognition Historical perspective
Profit (and revenue) determined on the basis of the increase in the net worth of the firm
Supplanted by the notion that profit and revenue had to be realised
Developed into the revenue recognition principle (or realisation principle)
A distinction between capital and profit emerged from court rulings

6. Criteria for revenue recognition
At what point during the earning process can revenue be recorded as earned because there is sufficient evidence?

7. Criteria for revenue recognition

8. Criteria for revenue recognition
Recognition criteria are based on the desire for both relevant and reliable accounting information
measurability of asset value
existence of a transaction
substantial completion of the earning process

9. Revenue measurement
Framework – provides 2 criteria for revenue recognition
it is probable that any future economic benefit associated with the item will flow to or from the entity
the item has a cost or value that can be measured with reliability
Revenue recognition is not straightforward because of the wide range of different business revenue-generating activities and circumstances

10. Revenue measurement IAS 18/AASB 118 Revenue
revenue is to be measured at the fair value of the consideration received or receivable

11. Sale of goods
The sales point is generally the most appropriate point to measure and record revenue as all three criteria are met
The sales point is when the product is delivered or the services are rendered, or when title passes to the customer

12. Exceptions to sales basis
Exceptions to using the sale point are
revenue recognised during production
e.g. construction contracts
revenue recognised at the end of production
production is the critical event and the sale is assured
revenue recognised when cash is received after the sale is made
instalment method and the cost recover method

13. Rendering of services
Service revenue is to be recognised by reference to the stage of completion
It is recognised in the period in which the service is rendered

14. Interest, royalties and dividends
Can be recognised when received
For some items, the passing of time signifies revenue has been earned
e.g. interest revenue

15. Developments in revenue recognition and measurement
IASB/FASB joint project
Void in revenue recognition and measurement guidance and a lack of a conceptual basis for resolving issues
Revenue transactions have become more complex

16. Developments in revenue recognition and measurement
They propose
recognising revenues when they arise
measuring them at fair value at that point
measuring them when they arise from an increase in assets or a decrease in liabilities, at the fair value of that change

17. Developments in revenue recognition and measurement
Resulting changes in emphasis
revenue is recognised when it arises
changes emphasis from realisation to timeliness
revenue can result from the changes in asset and liability values and from holding assets
that is, from remeasurements
revenue recognition and measurement reflect fair value
measurement should be reliable

18. Developments in revenue recognition and measurement
Tentative agreement that two criteria must be met to recognise revenue
a change in assets or liabilities must have occurred
the elements criterion
the change in assets or liabilities can be appropriately (reliably) measured
the measurement criterion
no probability criterion
There is less emphasis on ‘substantial completion of the earnings process’ and on notions of ‘realisation’ and ‘earned’

19. Fair value measurement
Under a mixed measurement attribute model, all items are measured at fair value at acquisition and thereafter are carried at historical cost or written down historical cost although some items are subsequently remeasured to fair value
Gains and losses are recognised when they occur even if they are unrealised

20. Financial statement presentation
IASB/FASB joint project
Tentative conclusions are
an all-inclusive, single income statement where all changes to assets and liabilities will be disclosed
realisation is not the basis for inclusion of items
separate disclosure of performance (income flows) and remeasurement (valuation adjustments)

21. Issues for auditors
Primary issue is the overstatement of revenues by managers
intention is to deceive users
bonuses
managing earnings
over-optimism
fraud

22. Summary
Issues relating to the definition, measurement and recognition of revenue
Critical recognition points
Criteria for revenue recognition
Revenue measurement
Guidance provided by standard setters
Current projects and developments
Issues for auditors

23. Key terms and concepts Revenue Behavioural view of revenue
Earning process
Criteria for revenue recognition
Point of sale
Fair value
Sales of goods and the rendering of services