Revenue recognition

IAS 18 Revenue

IAS 18 – Revenue definition

Revenue is the gross inflow of economic benefits during a period arising in the course of ordinary activities when those inflows result in increase in equity, other than increase relating to contributions from equity participants.

Measurement of revenue

Revenue is to be measured at fair value of the considerations received or receivable taking into account the amount of any trade discounts and rebates.

Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in the arm’s length transaction

Recognition criteria (revenue from the sale of goods)The significant risks and rewards of ownership of the

goods have been transferred to the buyer. The seller retains neither continuing managerial

involvement to the degree usually associated with ownership nor effective control over goods sold.

The amount of revenue can be reliably measured. It is probable that economic benefits associated with

the transaction will flow to the seller.The costs incurred or to be incurred in respect to the

transaction can be measured reliably.

Uncollectible accounts/Doubtful or Bad debts

Companies that make sale on credit will always have some customers who will not pay.

The accounts owed by such customers are called uncollectible accounts or bad debts.

Methods of recording uncollectible accounts

Direct write-off method records the bad debt in the period in which company determines that it cannot collect a specific receivable.

Allowance method enters the expense on an estimated basis in the accounting period in which the sale on amount occur.

Estimating uncollectible accounts expense

Percentage of net sales method (income statement approach)

Accounts receivables aging method (balance sheet approach)

Recognition criteria(revenue from the rendering of services)

Revenue from the rendering of services can be recognized by reference to the stage of completion if the final outcome can be reliably estimated.

This would be the case if

The amount of revenue can be measures reliably.

It is probable that economic benefits associated with the transaction will flow to the seller.

The stage of completion can be measured reliably.

The costs incurred and the cost to complete can be measured reliably.

Recognition criteria(interest, royalties, and dividends)

Interest Is recognized using “effective interest method”

Dividends Are recognized when the shareholder has a right to receive payment

Royalties Are recognized on accrual basis in accordance to royalty payment

It is probable that economic benefits associated with the transaction will flow to the entity.

The amount of revenue can be measures reliably.

Disclosures

• the accounting policies adopted for the recognition of revenue, including the methods for determining stage of completion for the rendering of services;

• the amount of each significant category of revenue recognized during the period, including sale of goods, rendering services, interest, royalties, dividends;

• the amount of revenue recognized from the exchange of goods or services in each category.

An entity shall disclose:

IAS 2 Inventories

Inventories are assets:held for sale in the ordinary course of

business;in the process of production for such sale;

orin the form of materials and supplies to be

consumed in the production process or in the rendering of services.

Measurement of inventories

MIN { Cost ; Net realisable value }

Shall comprise all costs of purchase, costs of conversion, and other costs incurred in bringing the inventories to the present location and condition

Is the estimated selling price in ordinary course of business less

the estimated costs of completion and

the estimated costs necessary to make the sale

Cost formulasSpecific identification of cost (specific costs are

attributed to identified items of inventory)

Weighted average cost (the cost of each item is determined from the weighted average of the cost of similar items at the beginning of a period and the cost of similar items purchased and produced during the period)

FIFO- first-in, first-out (the items of inventory that were purchased or produced first are sold first, and consequently the items remaining in inventory at the end of the period are those most recently purchased or produced)

The use of the last-in, first-out (LIFO) formula is prohibited!

Write-down of inventories to net realizable value

The amount of any write-down of inventories to net realizable value shall be recognized as an expense in the period the write-down occurs.

The amount of any reversal of any write-down of inventory (arising from the increase in the net realizable value), shall be recognized as a reduction to the amount of inventories recognized as an expense in the period in which the reversal occurs.

Disclosures

• the accounting policies adopted in measuring inventories (including cost formulas used);

• the total carrying amount of inventories and the carrying amount in the classification appropriate to the entity;

• the amount of inventories recognized as an expense during the period;

• the amount of any write-down of inventories recognized as an expense in the period;

• the amount of any reversal of a write-down to net realizable value and the circumstances that led to such reversal;

• the carrying amount of inventories pledged as security for liabilities.

The financial statements shall disclose:

Periodic and perpetual inventory systems

Periodic inventory system (under this system no detailed record of inventory is kept during the year and a physical inventory must be taken at the end of the year to establish ending inventory)

Perpetual inventory system (under this system a continuous record of inventory is maintained by keeping detailed records of the purchase and sales of inventory)

Periodic inventory system

Beginning inventory+

Net purchases=

Goods available for sale-

Ending inventory =

Cost of goods sold

Perpetual inventory system

When using the perpetual inventory system, a record kept item by item of all inventory movements as they occur.

Accounting records

Inventory Cost of goods sold

Accounts payable Inventory

IAS 16 Property, Plant and Equipment

Definition

Property, plant and equipment (PPE) are tangible items that:

• are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and

• are expected to be used during more than one period

Criteria for recognition

it is probable that future economic benefits associated with the item will flow to the entity;

the cost of the item can be measured reliable.

An item of PPE should be recognized as an asset if, and only if:

Measurement at recognition

An item of PPE that satisfies the recognition criteria should be recognized at cost.

Cost is the amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire an asset at the time of its acquisition, or construction.

Elements of costPurchase price, including import duties,

nonrefundable purchase taxes, less trade discounts and rebates

Costs directly attributable to bringing the asset to the location and condition necessary for it to be used in a manner intended by the entity

Initial estimate of costs of dismantling and removing that item and restoring the site on which it is allocated, the obligation for which an entity incurs either when the item is acquired or as a consequence of having used the item during a particular period for the purposes other than to produce inventories

Examples of directly attributable costs

Employee benefits of those involved in the construction or acquisition of the item of PPE

Costs of site preparationInitial delivery and handling costsInstallation and assembly costsCosts of testing whether the asset functioning

properly, after deducting the net proceeds from selling any items produced while brining the asset to that location and condition; and

Professional fees.

Examples of costs that are not directly attributable costs

Costs of opening a new facilityCosts of introducing a new product or serviceCosts of conducting business in a new location or with a

new class of customerAdministration and other general overheads costsCost incurred while an item capable of operating in a

manner intended by management has yet to be brought into use or is operated at less than full capacity

Initial operating lossesCosts of relocating or reorganizing part or all of an

entity’s operations.

Acquisition of an item of PPE in exchange for another asset

The cost of an item of property, plant and equipment acquired in exchange for another asset is measured at fair value unless the exchange lacks commercial substance or the fair value cannot be reliable measured.

If the acquired item is not measured at fair value, its cost is measured at the carrying amount of the asset given up.

Subsequent costs

Ordinary repairs/Day-to-day servicing

Costs arerecognized in profit and loss as incurred

Capital expenditure/Extraordinary repairs

Increase of economic benefits

Costs are recognized in the carrying amount of

an item

Measurement after recognition

Two models:Cost model. After acquisition as an asset,

an item of PPE shall be carried at its cost less accumulated depreciation and impairment losses.

Revaluation model. After recognition as an asset, an item of PPE whose fair value can be measured reliably shall be carried at a revaluated amount (fair value at the date of revaluation less any subsequent depreciation and impairment losses.

Revaluation modelBasic rule

Increase in carrying amount

Reduction in value

Other comprehensive income

Statement of changes in equity (revaluation surplus/reserve)

Revaluation loss

Statement of comprehensive income

Revaluation shall be made with sufficient regularity.

If an item of PPE is revaluated, the entire class of PPE to which that asset belongs shall be revaluated.

Revaluation model (accumulated depreciation)

restated proportionately with the charge in the gross carrying amount of the asset so that the carrying amount after revaluation equals its revaluated amount.

eliminated against gross carrying amount of the asset and the net amount restated to the revalued amount of the asset.

When an item of PPE is revaluated, any accumulated depreciation at the date of revaluation is treated in one of the following ways:

Depreciation The depreciable amount of an asset shall be allocated on a systematic basic over its useful life.

Depreciable amount is the cost of an asset less its residual value.

The depreciation method used shall reflect the pattern in which the asset’s future economic benefits are expected to be consumed by the entity.

The residual value and the useful life of an asset shall be reviewed at least at each financial year-end.

Definition of key terms

Residual value. The estimated amount that an entity would currently obtain from the disposal of the asset, after deducting the estimated costs of disposal, if the asset were already of the age and in condition expected at the end of its useful life.

Useful life. The period over which an asset is expected to be available for use by an entity; or the number of production or similar units expected to be obtained from the asset by an entity.

Methods of computing depreciation

Straight-line method results in a constant charge over the useful life

Diminishing balance method results in a decreasing charge over the useful life

Units of production method results in a charge based on expected use or output

Straight-line depreciation

Cost Residual value

Useful life

Diminishing balance method( accelerated method)

Carrying Rate on declining

amount balance

x

Units of production method

Cost Residual value

Estimated units of useful life

Impairment (IAS 36 impairment of Assets)

Carrying amount Recoverable amount>

Impairment loss (statement of comprehensive

income) The higher of

Fair value less costs to sell

Value in use

The amount of impairment loss recognized in profit and loss during the period

The amount of reversal of impairment loss recognized in profit and loss during the period

The events and circumstances that led to the recognition or reversal of impairment loss.

The basis for determining recoverable amount.

Impairment of PPE Key disclosure requirements

Derecognition

The carrying amount of an item of PPE shall be derecognized:

on the disposal; or

when no the future benefits expected from its use or disposal.

The gain or loss from the derecognition of an item of PPE (a difference between the net disposal proceeds and the carrying amount of the asset) shall be included in profit and loss.

DisclosuresThe financial statements shall disclose for each class of PPE:

the measurement bases used for determining the gross carrying amount

the depreciation methods used; the useful lives or depreciation rates used;

the reconciliation of the carrying amount at the beginning and end of the period

If PPE are stated at revaluated amounts the following shall be disclosed:

the effective date of the revaluation;

methods and significant assumptions used in estimating items at fair values;

the revaluation surplus indicating the change for the period.

IAS 38 Intangible Assets

Definition

Intangible asset. An identifiable non-monetary asset without physical substance.

An asset is identifiable if it- is capable of being separated from the entity and sold, transferred, licensed or rented individually or in combination with related contract, asset etc.

- arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or other rights or obligations

Control and future economic benefits

An entity controls an asset if the entity has the power

to obtain future economic benefits flowing from the underlying resource and

to restrict the access of others to those benefits.

The future economic benefits flowing from an intangible asset may include revenue from sale of products or services, cost savings, or other benefits.

Recognition

It is possible that the expected future economic benefits that are attributable to the asset will flow to the entity;

The cost of the asset can be measured reliably

An item may be recognized as an intangible asset when it meets the definition of the intangible asset and meets the following recognition criteria:

Measurement at recognition

Intangible assets

Acquired intangible assets

Internally generated intangible assets

Measurement at cost

goodwill

other internally generated intangible assets

The cost of separately acquired intangible asset comprises purchase price and directly attributable costs of preparing assets for use.

Internally generated intangible assets

In order to determine whether an internally generated intangible asset meets the criteria for recognition, its generation is classified into a research phase and a development phase.

Research is original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding.

Development is the application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, products, processes, systems or services before the start of commercial production or use.

The technical feasibility of completing the asset so that it will be able for use or sale

The intention to complete the asset and use or sell itThe ability to use or sell the assetHow the asset will generate probable future

economic benefitsThe availability of adequate technical, financial and

other resources to complete the development and to use or sell the asset

The ability to measure reliably the expenditure attributable to the asset during development

Development expenditure may be recognized as an intangible asset when,

and only when, all of the following can be demonstrated

Measurement after recognition

Cost model

An intangible asset shall be carried at its cost less any accumulated amortization and impairment losses.

Revaluation model

An intangible asset shall be carried at a revaluated amount, being its fair value at the date of the revaluation less any subsequent accumulated amortization and impairment losses.

The fair value shall be determined by reference to an active market.

Disclosures

Whether the useful lives are indefinite or finite (the useful lives and amortization rates used, amortization methods used);

The gross carrying amount and accumulated amortization and impairment losses at the beginning and end of the period;

The line items of the statement of comprehensive income in which any amortization of intangible assets is included;

A reconciliation of the carrying amount at the beginning and end of the period.

The entity disclose the following for each class of intangible assets, distinguishing between internally generated intangible assets and other intangible asset