Revenue

S4 to S6

1
Operating Activities: Recognition and Measurement Issues
Income
Framework

increases in economic benefits during the accounting
period in the form of inflows or enhancements of
assets or decreases in liabilities that result in increases
in equity, ..
2
Income vs Revenue
What is Income?
FRS Framework para 4.29
Encompasses both Revenue and Gain
Revenue arises in the course of ordinary activities
Eg, sales, fees, interest, dividends, royalties, rent

What is Revenue?
FRS 18 para 7
Gross inflow of economic benefits
Arising in course of ordinary activities
Increase in Equity
3
Revenue Recognition Criteria (RRC)
Revenue recognition principle (Statement of
Financial Accounting Concepts (SFAC) No 5):
Realised / Realisable; and
Earned

What is
4
Revenue? (FRS Framework para 4.29)
Recognition? (Framework paras 4.47 & 4.48)
Realisation? (SFAC No. 6 para 143)
Earned? (SFAC No. 5 para 83)
Revenue Recognition Criteria (RRC)
Revenue recognition principle (Statement of Financial
Accounting Concepts (SFAC) No 5):

Realised / Realisable
converting non-cash resources and rights into $
sale of assets for cash and claims to cash


Earned
the enterprise has substantially accomplished
what it must do to be entitled to the benefits
represented by the revenue

5
FRS 18 Revenue
a) Sale of goods

b) Rendering of services

c) Use by others of entity assets yielding interests,
royalties and dividends

Exclusions:
FRS 11 Construction Contracts
Para 6
6
2 Main Issues in Revenue Recognition
and Measurement














Timing
Quantum
Revenue is recognised when it is probable that future
economic benefits will flow to the entity and these
benefits can be measured reliably.
Para 9 Revenue shall be measured at the fair value of
the consideration received or receivable.

7
Revenue from
Sale of Goods
FRS 18:14 Revenue from sale of goods should be recognised
when all the following conditions have been satisfied:

1. Transfer of significant risks and rewards of ownership

2. No managerial involvement and effective control over the
goods sold

3. Inflow of economic benefits is probable

4. Amount of revenue can be measured reliably

5. Cost incurred or to be incurred can be measured reliably
8
Sales Discounts / Sales Returns and
Allowances
Revenue should be measured at the fair value of the
consideration received or receivable (FRS 18:9)
9
10
On January 6, Timberland sold $1,000 of
merchandise on credit with terms of 2/10, n/30.

Journal entry to record the sale:
Sales on Account (Credit Sales)
11
If the customer remits the appropriate amount on
January 14, what entry would Timberland make?

Journal entry to record the receipt:

Payment Made Within the Discount Period
12
If the customer remits the appropriate amount on
January 19, what entry would Timberland make?

Journal entry to record the receipt:

Payment Made Outside the Discount Period
13
On January 19, a Timberland factory stores credit card
sales were $3,000. The credit card company charges a
2% service fee.

Prepare the journal entry to record the sales:
Accounting for Credit Card Sales
14
Sales Returns and Allowances
On July 8, Company Y returns $500 of hiking boots
originally purchased on account from Timberland.

Prepare the journal entry:
Recording Sales Revenue GST
Without GST
Dr Cash / A/R $x
Cr Sales Revenue $x

With GST
Dr Cash / A/R $x
Cr Sales Revenue $x
Cr GST Payable $x

FRS 18 para 8


15
FRS 18:8
Revenue includes only the gross inflows of
economic benefits received and receivable by
the entity on its own account.
16
Quiz
insurance agents

stockbrokers
17
Q1
Scenario 1

Scenario 2

Scenario 3
18
Quiz
risk and rewards vs legal title vs possession

refund
warranty

Revenue vs Expense
Revenue - recognition
Expense doubtful debts

19
Revenue from
Rendering of Services
20
Revenue from
Rendering of Services
Recognition of revenue from rendering of services:
Generally, it must be realised/realisable and earned

FRS 18:20
a) Amount can be measured reliably

b) Inflow of economic benefits is probable

c) Stage of completion measured reliably

d) Costs incurred / costs to complete the transaction can
be measured reliably
21
Determining Stage of Completion
FRS 18:24

(a) surveys of work performed;

(b) services performed to date as a percentage of
total services to be performed; or

(c) the proportion that costs incurred to-date bear to
the estimated total costs of the transaction.
22
Quiz
progress payments and advances vs stage of
completion

uncertain outcome

loss outcome
23
Q2
Dragon Place
24
Q10
iCustom
25
Use of Asset FRS 18
Use of asset General recognition: only if
Inflow of economic benefit is
probable; and
Amount can be measured
reliably
Interest On effective interest method
FRS 39
Royalty On an accrual basis in
accordance with the
substance of the agreement
Dividend When the shareholders right to
receive payment is established
26
Recording Service Revenue
Without GST
Dr Cash / A/R $x
Cr Service Revenue $x

With GST
Dr Cash / A/R $x
Cr Service Revenue $x
Cr GST Payable $x

FRS 18 para 8


27
Quiz
Unpaid interest before acquisition of interest-bearing
investment
pre-acquisition and post-acquisition
28
Q7
Vienna Restaurant
29
Disclosure
Accounting policy

Amount of each significant category of revenue:
i. Sale of goods
ii. Rendering of services
iii. Interest
iv. Royalties
v. Dividends

30
New Standard for
Revenue Recognition & Measurement
Title: Revenue from Contracts with Customers
Jointly issued by IASB (IFRS 15) and FASB
ASC is expected to issue the new standard soon
Effective 1 January 2017
31
Core Principle
Recognise revenue to depict the transfer of promised
goods or services to customers in an amount that
reflects the consideration to which the entity expects to
be entitled in exchange for those goods or services

5 Steps to apply the Core Principle

Step 1: Identify the contract(s) with the customer

Step 2: Identify the separate performance obligation(s)

Step 3: Determine the transaction price

Step 4: Allocate the transaction price

Step 5: Recognise revenue when a performance obligation is
satisfied
Other Gains/Losses
34
Other Gains/Losses
35
Unrealised?
No inflow of resources (because no external
transaction)
= paper gains

Realised?
Other Gains/Losses
Fair value on Property, Plant and Equipment (FRS 16)
Land
Building

Fair value on Investment Property (FRS 40)

Mark-to-market gains/losses on Investments (FRS 39)
Investment in Trading Securities
Investment in Available-For-Sale securities
36
37
Classification of Financial Assets:

(a) financial assets at fair value through profit or loss
(FVTPL);

(b) held-to-maturity investments;

(c) loans and receivables; and

(d) available-for-sale financial assets (AFS).

FRS 39:45
Trading Securities

Upon initial recognition: at Fair Value (exclude
transaction costs)

At B/S date: marked to market
Unrealised holding gains/losses: to P/L

Upon disposal
Realised gains/losses: to P/L


38
Trading Securities
39
Year 2
DR Cash $15m
CR Gain on disposal of TS (P/L) $5m
CR TS $10m
Year 1 - Trading Securities - $8m (cost)
As at end of Year 1 - Marked-to-market - $10m
Year 2 - Trading Securities sold for $15m


End of year 1
DR TS $2m
CR FV gain on TS (P/L) $2m
Upon initial recognition: at Fair Value (including
transaction costs)

At B/S date: marked to market
Unrealised gains/losses: directly to Fair Value
Reserve (Equity/OCI)

Upon disposal
Realised Gain/loss on disposal to P/L
Fair value reserve transferred/recycled to P/L
40
Available-for-Sale Securities
Available-for-Sale Securities
Year 1 - AFS securities - $8m (cost)
As at end of year 1 marked-to-market is $10m
Year 2 - AFS securities sold for $15m


41
Year 2
DR Cash $15m
DR Fair value reserve on AFS (Equity) $2m
CR AFS $10m
CR Gain on disposal of AFS (P/L) $7m
End of year 1
DR AFS $2m
CR Fair value reserve on AFS (Equity/OCI) $2m
Presentation in F/S
Trading securities

Available-for-sale securities
42
Q3
Myers
43
Q8 and Q9
CT
44
Q11
45
46
Revenue
S4 to S6 END

46
Operating Activities: Recognition and Measurement Issues