Wiley IFRS: Practical Implementation Guide and Workbook, 3rd Edition

Chapter 12

REVENUE (IAS 18)

BACKGROUND AND INTRODUCTION

The Framework for the Preparation and Presentation of Financial Statements defines “income” as “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.” Income encompasses both revenue and gains.

“Revenue” should be distinguished from “gains.” Revenue arises from an entity’s ordinary activities. Gains, however, include such items as the profit on disposal of noncurrent assets, or on retranslating balances in foreign currencies, or fair value adjustments to financial and nonfinancial assets.

This Standard prescribes the requirements for the recognition of revenue in an entity’s financial statements. Revenue can take various forms, such as sales of goods, provision of services, royalty fees, franchise fees, management fees, dividends, interest, subscriptions, and so on.

The principal issue in the recognition of revenue is its timing—at what point is it probable that future economic benefit will flow to the entity and can the benefit be measured reliably.

Some of the recent highly publicized financial scandals that caused turmoil in the financial world globally were allegedly the result of financial manipulations resulting from recognizing revenue based on inappropriate accounting policies. Such financial shenanigans resulting from the use ...