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GODFREY

HODGSON
HOLMES
TARCA

CHAPTER 9
REVENUE

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


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

Criteria for revenue


recognition

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

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

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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
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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
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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

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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

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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

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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

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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
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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
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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

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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)
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Issues for auditors


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

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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
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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
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