International Accounting Standard 18 (IAS 18) defines revenue as “the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity when those inflows result in increases in equity, other than increases relating to contributions from equity participants”.
Revenue is usually generated from two sources. Firstly, sale of goods and rendering of services; and secondly, use by others of entity assets.
Goods includes items produced by the entity for the purpose of sale and the items purchased for reselling, for example items purchased by a retailer or land or property held for resale. Revenue from sale of goods is recognized when
- the risks and rewards of ownership of goods are transferred to the buyer
- it is probable that the economic benefits will flow to the seller
- amount of revenue can be measured
- the seller neither retains effective control over the goods nor continuing managerial involvement
- the costs can be reliably measured
The rendering of services usually involves the performance of a contractually agreed task over an agreed period of time. Revenue from rendering of services is recognized when
- the stage of completion can be reliably estimated
- the amount of revenue can be measured reliably
- it is probable that the economic benefits will flow to the entity
- the cost incurred can be measured reliably
The use by others of entity assets can give rise to the revenue in the following forms:
1. Interest: charges for the use of funds or amounts due to the entity;
2. Royalties: charges for the use of long-term assets of the entity, for example, patents, trademarks, copyrights
3. Dividends: distributions of profits to shareholders in proportion to their holdings of a particular class of capital equity capital
Revenue refers only to the amounts that are received or receivable by an entity on its own account. The amounts received or receivable on account of other parties are not treated as revenue because they are not the economic benefits that flow the entity and they do not result in increase in the equity. The examples include sales taxes, value added taxes, and insurance premiums collected by an agent (revenue in this case would only be the amount of commission).
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