Introduction
The International Accounting Standard 18 (IAS 18) was created in 1982 purposely to highlight and provide all the accounting conditions of how to treat revenue. Revenue is an important aspect for evaluating the financial accomplishment and performance of a particular business unit. IAS 18 was reviewed in 1993 in order to meet the requirements of financial statements such as the income statement. Revenue recognition conditions provided by IAS 18 are specific on how to identify and treat revenue arising from sale of goods.
Prior to the development of IAS 18, business entities experienced difficulties in separate revenue arising from sales of goods with other revenues as dividends and interests. IAS 18 covers all the revenues realized from business activities such as sales of goods or services, royalties and interest. IAS 18 was implement in 1995 and it has operational since then, however, from 1st January 2018, IFRS 15 is expected to replace IAS 18.
Revenue refers to gross income generated by a business activity. For instance in a company engages in the manufacture of software and hardware for computers. This company has two sources of revenue, the company acquires it revenue from selling computer software and at the same time, the company also generates revenue from sale of computer hardware.
In accounting, revenue refers to either rise in assets or reduction in liabilities when the business is undertaking its activities. According to IAS 18, revenue refers to the aggregate economic benefits realized by a business entity as the business carries out its normal functions. This economic benefits include, cash, receivables and other additional assets. The economic benefits realized by a business must cause a rise in equity in order to be included as revenue. A business enterprise can earn revenue by undertaking any of the following activities such as selling goods or services, earning interest, dividends and royalties.
For example, if a business entity bought shares of another company, the dividend received by the business is recognized as revenue. A business may also purchase an interest bearing asset such as bonds, the interest received is also treated as revenue. Using the accrual basis, revenue is identified once the commodities or services reach the consumers from the seller or producer. The cash basis identifies revenue once the cash gets to the producer or seller that is revenue is identified after the consumer pays the cash of goods sold to him/ her by the producer. Revenue is the first entry to be made in an income statement
The Initial Recognition of Revenue
The main objective of accounting for revenue involves deciding at what time revenue is to be recognized. IAS 18 provides explicit details on when to recognize revenue. The process of recognizing revenue is based on whether the economic benefits such as cash, receivables or other assets are expected to flow into the business entity in the future after the business has undertaken its normal activities such as sales of goods or services.
IAS 18 provides that revenue should be recognized before the costs of sale is subtracted from the total revenue. This is important in recognizing the total revenue realized by the business, for instance, if a company sells its products at $ 700 to a particular customer, and if the company used $ 250 to produce the products, the revenue recorder is $ 700 instead of % 450. The revenue is identified from the particular activity undertaken by the business entity such as sale of goods or services.
For instance, the proceeds gained from disposal of business property or equipment are not recognized as revenue especially if the business ceases from operating. The IAS has defined the actual revenue and sales taxes paid the consumers to the business entity are also not identified as revenue, if the business entity pays the sales taxes to the required authority. For example, consider that a business sells a particular commodity at $95 and the sales taxes is 5% of the total price, then the revenue realized by the business is 90.25. According to IAS 18, revenue must be calculated at the fair value of the consideration received.
Measurement of Revenue