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- 2. 2 Table of Contents Background and Introduction ..............................................................................................................3 Revenue recognition of Airline Company.............................................................................................5 Revenue recognition of service concession arrangements ......................................................................6 Revenue recognition for customer loyalty programs..............................................................................6 Accounting treatment of revenue from agreements for the construction of Real Estate ............................7 Accounting treatment for the rendering of services and sale of goods .....................................................7 Accounting treatment while exchanging of goods and services ..............................................................8 Revenue recognition criteria of Telecommunication company selling talk time through scratch...............9 Criteria of revenue recognition with examples when goods are sold under " Sale or Return .....................9 Revenue recognition principles for Media Company .............................................................................9 Conclusion.......................................................................................................................................10 References .......................................................................................................................................11
- 3. 3 Background and Introduction The structure for the making and displaying of Financial Accounts states "incomes" as "enhancing of economic profits between the accounting period in the aspect of inflows or increment of assets or decrement of liabilities that effect in the growing of the equity, other than those reciting to depositions from equity participants". Both revenue and gains are included in income. "Gains" and "Revenue" should always be discriminated. Revenue is the results of entity's normal activities and gains include the profit on interpreting balances in foreign currencies, or impartial value adjustments to non-financial and financial assets, or on disposal of the non-current assets. Scope Revenue generating from the sale of goods, providing of services and from entity's assets used by others like dividends, yielding interest, or royalties (Byard, et. al., 2011). Revenue generating from the following items will not be deal under this standard, as they will be dealt with other standards: Exhaustion of Minerals Leases (IAS 17) Alteration in the current assets value Alteration in the market values of financial statements (IAS 39) Initial identification of the agricultural produce (IAS 41) Initial identification and alteration in the value of biological assets (IAS 41). Initial Recognition and Measurement of Revenue By satisfying the following conditions, revenue generated from the sale of goods can be easily acknowledged: The owner has given to the purchaser the main risks and returns of ownership of the goods; The owner will not get involved in managerial decisions i.e. ownership or control over the goods sold; The measurement of the revenue can be perform reliably;
- 4. 4 The economic advantages related to the transaction will be given to the owner when it is appropriate; and The transactions cost or occurred cost can be measured fairly. When it is appropriate that the economic advantages related to the transaction will be given to the entity, at that time only, revenue can be measured. But in some cases, this may not be appropriate until the time, consideration is not received. For instance, it may be doubtful that a foreign governmental authority will give the permission to give up the amount collected from the sale in a foreign country (Chapple, et. al., 2010). Concept of Sale of Good with Illustrations from Real Companies Let’s understand the concept of sale of good with an illustration of ‘Hyatt’ company, UAE: The case of ‘Hyatt’ company, UAE: The delivery is delayed at the request of the purchaser but the purchaser receives the title and accepts the billing. When a buyer takes the title, revenue is measured, provided: it is appropriate that delivery will be done; when the sale is recognized, the item should be on hand, identified and prepared for the delivery to the purchaser; the purchaser importantly recognizes the adjourned delivery instructions; and The payment terms will apply generally. When there is a normal motive to purchase or manufacture the goods in time for delivery, revenue can’t be recognized (Mirza, et. al., 2010). Disclosure Following items should be disclosed by an entity as per IAS 18: the accounting policies followed or accepted for the measurement of the revenue, including the methods followed to find out the stage of ending of the transactions including the providing of services; Including the revenue generated from the providing of services, dividends, royalties, interest and the sale of goods, every important category of revenue will be recognized during the period.
- 5. 5 In every important category of revenue, the revenue generated from the exchange of goods or services will be included. Revenue recognition of Airline Company The principles of Revenue Recognition of Airline Companies Due to the low margins of the airline industry, revenue recognition of this industry becomes the most difficult accounting policies. Following are some critical issues for the revenue recognition of the airline industry: Unredeemed tickets – The tickets, part of which are sold by the airlines may have the durability of one year or more or can be related to a specific flight and if it is not used cannot be returned back. Airline Companies have thought about the timing of recognizing the revenue founded on statistical data for the unredeemed tickets. Commission and Concessions – Concessions, which are provided as an encouragement for the buying of tickets, should be deducted from the gross revenue. Commissions which are paid to agencies should be taken as an expense and at the same time revenue to which commissions are associated should be measured. Airport Charges and Taxes – Airline Companies has to follow the duty of the collector of taxes on the part of governments when the tickets are sold. The amount collected from the customers has to be discriminated between amounts for airports or governments and amounts for airline services (Mirza, et. al., 2010). Fuel surcharges – Because of the current continuous increment and instabilities on the oil prices, a lot of airlines have thought to attach the fuel charges with the tickets price, with an intention to decrease the effects of the oil price. Disclosures –Following are the disclosures that appear in the financial statements and they are: Revenue's definition, revenue's recognition timing, the place where the commission will be recognized in the income statements, foundation of revenue recognition for the unredeemed tickets, amount of revenue which is not earned, or the amount of revenue arises from the net of discounts etc (Mirza, et. al., 2010).
- 6. 6 Revenue recognition of service concession arrangements Between the periods of November 2006, the IASB issued IFRIC 12, for the annual periods starting on or after January 1, 2008, service concession agreements become effective. The IFRIC endows pilot age on the accounting by private-sector manipulators for “public-to-private” service dispensation arrangements. This explanation will not denote the accounting by givers of the discounts. General principles for identifying and measuring the provinces and associated rights in service concession arrangements are made by the above interpretation. The IFRIC find out some issues, and the normal consent views on these issues which are as under: o The remedy of the operator's authorities over the infrastructure – The operator's authority on the infrastructure will not be measured as property, equipment, and plant of the operator; from the date the service arrangement doesn't delegate the authority to control the utilization of the public service infrastructure to the manipulator (Mulyadi, et. al., 2012). o Building or Advance Services – For the revenue and costs associated with the building or advancing services in compliance with IAS 11. o Retribution gave by the grantor to the manipulator – If the manipulator or operator provides the building or advanced services, the payment received or receivable by the manipulator will be recognized at its true value. Revenue recognition for customer loyalty programs As per IFRIC 13, customer loyalty awards are grant which is given to customers as a part of a sales transaction. Sales transaction can be a sale of goods and rendering of services. The customer has the option to redeem the benefits received in future. As per IAS 18, there is need to evaluate the fair value of the loyalty received or receivable is will be allocated to the credits of the award and other components of sale. Thus revenue of rewards will be measured by their fair value.
- 7. 7 An entity should allocate the sales which have been earned after providing the loyalty schemes as a liability to the credits of awards. The award must be recognized as a separate part of a transaction of sale. The amount which has been allocated to the loyalty award must be valued at the fair value (Chapple, et. al., 2010). The deferred portion of the proceeds from loyalty programs must be recognized when the seller fulfill all its obligations. For instance, the Ericsson Company, UAE has offered 2000 loyalty cards to its customers. Thus the portion of the sale will be estimated for this 2000 and that portion will be measured at fair market value. This amount will get credited as sales when the loyalty card will be fully distributed to the customer. Accounting treatment of revenue from agreement for the construction of Real Estate As per IFRIC 15, provides the supervision for the treatment of the revenue for the agreement of real estate contracts which are covered under the IAS 11. As per IAS 11, the revenue will be recognized when the results of any contract can be measured appropriately. The revenue and cost of the project will be considered from the balance sheet at the time of completion stage. When the loss of the contract exceeds the revenue then the loss has to be treated under the income statement without considering the completion stage. A cumulative basis is considered for calculation of a percentage of the completion of a contract (Yeaton, 2015). For instance, Granite construction, UAE is planning for a gigantic project which will be the tallest building in the country and the project will take three years for completion. In this case, the revenue for the first year will be recognized by calculating a percentage of completion from the fair market value and competing cost. Thus in this way the revenue, will be recognized after calculating a percentage of completion. Accounting treatment for the providing of services and sale of goods As per IAS 11, the revenue associated with the rendering of services can be recognized at the time when services are about to be completed or delivered. Furthermore, the final result of the services must be capable to be assessed. Further, there are many other conditions which need to be complied with in order to recognize the services rendered and selling of goods. The conditions are as followed:- The number of services should be identified in numerical terms.
- 8. 8 Economics benefits must be pouring to the seller of services. A reliable way should be there to measure the stage of completion of services Appropriate ways should also be there for measuring the actual cost incurred and completion cost (Byard, et. al., 2011). For instance, installation fees are a type of services under which the revenue will be recognized at the stage of completion. Sale of goods will be recognized after having the given things as below:- Buyer must receive all the rewards and risk associated with the goods Amount of revenue must be capable to be identified The cost incurred in performing the transaction should also be recognized. Economic benefits should also be assessable. Accounting treatment while exchanging of goods and services There are two ways of examining the exchange of goods. If the goods and services are exchanged having the same character then, they can be said that there is no transaction took placed and no revenue is recognized at the same time. In case goods and services of dissimilar characteristics are exchanged then it can be said that transaction has occurred. The revenue, in that case, will be acknowledged at the fair value(Nobes, 2012). If the fair value of the goods and services is difficult to recognize then revenue will be acknowledged at the fair value at the time when the goods and services were provided. Further, it has been clarified under SIC 31 that measurement of advertising services on barter basis can only be recognized by considering the notion barter transaction that has the following things:- Advertising services are exactly same as the advertising services in transaction occurred in a barter system. There is need to signify a principal number of transaction with amount involved. The payment mode should be cash or any other way of consideration such as marketable securities. (Securities must possess a realizable fair value at the time of comparison). Avoiding the occupation of the same party of the barter transaction.
- 9. 9 Revenue recognition criteria of Telecommunication company selling talk time through scratch In case if telecommunication Company sells scratch card then there will be recognition of revenue. But at the same time but if that scratch is used by the subscriber by making a call and consumption of talk time then revenue can be reliably identified. In case if the seller has a doubt in receiving the payment from the customer then, in that case, the allowance will be recognized by having doubtful accounts. But if a seller is fully sure of not receiving payment from the customer then this must not be recognized. Criteria of revenue recognition with examples when goods are sold under " Sale or Return As per IAS 18, revenue is measured at a value which is favorable and just in the market. The value which is considered for valuation is either received or receivable. Sale of goods recognized when the following things are fulfilled:- Transferring of associated risk and reward Amount can be measured easily Probable benefits must be flow to a seller. For instance, DHL sold the goods at the value of $1 million with having the retrospective discount of 2% during the period of April 1 to December 31 of $900000. The DHL will, in this case, will recognize revenue at $882000. A transaction can be analyzed easily. In a case when the risk and rewards are not transferred when the goods will get added to the closing stock of the supplier. An entity can retain the goods when there is the unsatisfactory provision or full ownership of goods could not be transferred. Revenue should only be recognized when the goods are actually sold not before. Thus it can be said that the recognition of revenue is subject to the consequent sake made by the buyer (Horton, et. al., 2013). Revenue recognition principles for Media Company Media Company can recognize revenue as and when the ads are aired disregarding of the fact that payment is received or not. As per IAS 18, in case when payment is received by media Company before the triggering of the event then the revenue will be recognized by debiting the
- 10. 10 cash amount and crediting the unearned revenue account, in case when there is no payment received an event is triggered then accounts receivable account gets debited and revenue is credited. Conclusion Therefore it can be concluded from the discussion that there are different standards and provisions for transactions occurred in business. The revenue can be recognized via following all the provisions and standards provided there in IFRS.
- 11. 11 References Byard, D., Li, Y., & Yu, Y. (2011). The effect of mandatory IFRS adoption on financial analysts’ information environment. Journal of accounting research, 49(1), 69-96. Available at http://onlinelibrary.wiley.com/doi/10.1111/j.1475-679X.2010.00390.x/full. Brüggemann, U., Hitz, J. M., & Sellhorn, T. (2013). Intended and unintended consequences of mandatory IFRS adoption: A review of extant evidence and suggestions for future research. European Accounting Review, 22(1), 1-37. Available at https://www.econstor.eu/bitstream/10419/56632/1/685018679.pdf Borker, D. R. (2012). Accounting, culture, and emerging economies: IFRS in the BRIC countries. Journal of Business & Economics Research (Online), 10(5), 313. Available at https://search.proquest.com/openview/3869a23b520ac245050d4ffeacb91212/1?pq- origsite=gscholar&cbl=2026884 Chapple, S., Moerman, L., & Rudkin, K. (2010). IFRIC 13: accounting for “customer loyalty programmes”. Accounting Research Journal, 23(2), 124-145. Available at http://www.emeraldinsight.com/doi/abs/10.1108/10309611011073232 Horton, J., Serafeim, G., & Serafeim, I. (2013). Does mandatory IFRS adoption improve the information environment?. Contemporary Accounting Research, 30(1), 388-423. Available at http://onlinelibrary.wiley.com/doi/10.1111/j.1911-3846.2012.01159.x/full Lomo, D. (2014). Public Accounting, International Standards, and You: A Closer Look on the Impact of IFRS and GAAP Convergence. Available at http://opencommons.uconn.edu/cgi/viewcontent.cgi?article=1366&context=srhonors_theses Mirza, A. A., Holt, G., & Orrell, M. (2010). International Financial Reporting Standards (IFRS) Workbook and Guide: Practical Insights, Case Studies, Multiple-choice Questions, Illustrations. John Wiley & Sons. Available at http://acca.synthasite.com/resources/International%20Financial%20Reporting%20Standards. pdf Mirza, A. A., Orrell, M., & Holt, G. (2010). Wiley IFRS: practical implementation guide and workbook. John Wiley & Sons. Available at https://books.google.co.in/books?hl=en&lr=&id=nSKYzfKhS_kC&oi=fnd&pg=PA1&dq=W iley+IFRS:+practical+implementation+guide+and+workbook&ots=xm0ZlHXFEE&sig=TW -
- 12. 12 bSgwoX6yCFRtpJIB_6Zbiivk&redir_esc=y#v=onepage&q=Wiley%20IFRS%3A%20practic al%20implementation%20guide%20and%20workbook&f=false Mulyadi, M. S., Soepriyanto, G., & Anwar, Y. (2012). IFRS adoption and taxation issue. International Journal of Arts and Commerce, 1(7), 159-165. Available at https://www.researchgate.net/profile/Martin_Mulyadi/publication/275956438_IFRS_adoptio n_and_taxation_issue/links/5729bb3b08aef7c7e2c22653.pdf Nobes, C. (2012). On the Definitions of Income and Revenue in IFRS. Accounting in Europe, 9(1), 85-94. http://www.tandfonline.com/doi/abs/10.1080/17449480.2012.664395