REVENUE

Revenue defined
Revenue is a key accounting element and fundamental to reporting on a firm's activities.
Directly related to the monetary event of value increasing in the firm. Assets received or
increased by revenue may include cash, receivables, and goods and services received in
exchange for goods and services provided. For example, a gain that meets the definition of
revenue may or may not arise in the course of ordinary activities. In the IASB Framework
Income is increasing 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.
Behavioural view of revenue, Revenue represents an increase in the total value of assets (or a
decrease in the value of liabilities) and capital other than additional investments by owners.
Paton and Littleton, earnings show company 'achievements'. Bedford emphasizes the
operating view of income and profit, in which profit is defined in terms of specific operations
performed by the entity rather than simply the result of applying accounting methods. Myers
relates the concepts of revenue and profit to certain key events created by corporate
managers.
Revenue recognition
Revenue recognition, During the nineteenth century, income (profit) for a business was
determined on the basis of increasing net worth. Chatfield states that this is done either
'through replacement accounting policy or by means of periodic asset valuations.
Criteria for revenue recognition, Three criteria to determine whether revenue or gain should
be recognized. These criteria are: the measurable value of assets, the existence of
transactions, substantial completion of the income process.
Analysis of criteria for revenue recognition, Measurability of asset value : Revenue can be
viewed as an inflow that increases the value of the total assets of the firm, with a concurrent
increase in equity. If there is no inflow of asset value that can be objectively determined,
revenue cannot be calculated objectively. Existence of a transaction : When an external party
in a reasonable transaction to pay a certain price for the company's products, the transaction is
objective evidence of an increase in value within the company. Substantial completion of the
earning process : Not explicitly stated in the Framework, focuses on the notion that revenue is
not generated until the firm has performed most of the activities the firm earns revenue.
Revenue measurement
The Framework, provides two criteria : (a) it is probable that any future economic benefit
associated with the item will flow to or from the entity (b) the item has a cost or value that
can be measured with reliability. IAS 18/MSB 118 states that revenue is to be measured at
the fair value of the consideration received or receivable.
Sale of goods, The point of sale in the revenue process was chosen as the most appropriate
time to measure and record revenue because it met the recognition criteria. At the time of the
sale, the transaction occurs, the seller receives a quantifiable asset, and the earnings process is
substantially completed.
Rendering of services, IAS requires that revenue associated with rendering of services is to
be recognized by reference to the stage of completion of the transaction
at reporting date.
Interest, royalties, and dividends, Can be recognized when received, meets all three general
recognition criteria (measurable, transaction, and substantial settlement). For some items,
accrued revenue may be recorded, even though there are no external transactions. An
example is interest income earned at the end of the accounting period.
Challenges for standard setters
Developments in revenue recognition and measurement,The IASB and FASB have
undertaken joint projects in relation to revenue recognition and measurement. Standard
setters have noted that there are inconsistencies between the IASB Framework and some
standards. Changes in emphasis in some areas, which may lead to changes in accounting
practices. As an example: Revenue is recognized in the period in which it is incurred,
Revenues arise from increases in assets or decreases in liabilities, Recognition and
measurement of revenue reflect fair value, Measurements must be reliable. The IASB agrees
that two criteria must be met to recognize revenue: element criteria, which require changes in
assets or liabilities to occur and measurement criteria, which require that changes in assets or
liabilities can be measured precisely.
Fair value measurement, The definition of revenue adopted by the IASB that revenue can
result from changes in the value of net assets. Several IASB standards require that gains and
losses arising from remeasurement of assets are included either in operating income or in
'comprehensive income.
Financial statement presentation, The IASB has a joint project with the FASB related to the
presentation of financial statements. This project was carried out to establish standards for the
presentation of information in financial statements. IAS 1 does not require a statement of
comprehensive income. In its discussion on the presentation of the Board's financial
statements, it has reached the following tentative conclusions: A single all-encompassing
income report, Realization is not the basis for inclusion of items, Separate disclosure of
performance and remeasurement.
Issues for auditors
The primary issue for auditors surrounding revenue is the risk that recorded revenue of
revenue can arise if transactions or events is overstated by managers. The risk of presenting
income that is too large. The underlying recorded revenue has not been incurred or is not
related to the entity, the amount of revenue has not been properly recorded, or the revenue for
the period relates to transactions for a future accounting period. In addition, there is a risk of
inaccurate revenue disclosures, for example, sales to related parties are not properly
disclosed.