Overview of IAS 18 Revenue contracts

Revenue arising from the sale of goods is recognised when: an entity transfers the significant risks and rewards of ownership and gives up managerial involvement usually associated with ownership or control; it is probable that economic benefits will flow to the entity; and the amount of revenue and costs can be measured reliably.
Examples of transactions where the entity retains significant risks and rewards of ownership and revenue is not recognised are as follows:

  • Where the entity retains an obligation for unsatisfactory performance not covered by normal warranty provisions;
  • Where the buyer has the power to rescind the purchase for a reason specified in the sales contract, and the entity is uncertain about the probability of return; and
  • Where the goods are shipped subject to installation, and that installation is a significant part of the contract.

Revenue from the rendering of services is recognised when the outcome of the transaction can be estimated reliably. This is done by reference to the stage of completion of the transaction at the balance sheet date, using requirements similar to those for construction contracts. The outcome of a transaction can be estimated reliably when: the amount of revenue can be measured reliably; it is probable that economic benefits will flow to the entity; the stage of completion can be measured reliably; and the costs incurred and costs to complete can be reliably measured.

Interest income is recognised using the effective interest rate method. Royalties are recognised on an accruals basis, in accordance with the substance of the relevant agreement. Dividends are recognised when the shareholder’s right to receive payment is established.

IFRIC 13, ‘Customer loyalty programmes’, clarifies the accounting for award credits granted to customers when they purchase goods or services (for example, under frequent flyer or supermarket loyalty schemes). The fair value of the consideration received or receivable in respect of the initial sale is allocated between the award credits and the other components of the sale.

IFRIC 18, ‘Transfers of assets from customers’, clarifies the accounting for arrangements where an item of property, plant and equipment is transferred by a customer (or the entity might receive the cash from the customer for the acquisition or construction of those items of property, plant and equipment), in return for connection to a network and/or ongoing access to goods or services. IFRIC 18 will be most relevant to the utility industry, but it might also apply to other transactions (for example, where a customer transfers ownership of property, plant and equipment as part of an outsourcing agreement).

Disclosures of IAS 18 Revenue contracts

  • accounting policy for recognising revenue
  • amount of each of the following types of revenue:
    • sale of goods
    • rendering of services
    • interest
    • royalties
    • dividends within each of the above categories
    • the amount of revenue from exchanges of goods or services