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SMEs Revenue

Revenue arises from the sale of goods, rendering of services, and use of entity assets. It is measured at the fair value of consideration received. For sales of goods, revenue is recognized when risks and rewards transfer. For services and construction contracts, revenue is recognized by stage of completion. Interest, royalties and dividends are recognized on an accrual basis. If payment terms constitute financing, revenue is the present value of expected receipts. Disclosures include revenue sources and construction contract details.

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75 views20 pages

SMEs Revenue

Revenue arises from the sale of goods, rendering of services, and use of entity assets. It is measured at the fair value of consideration received. For sales of goods, revenue is recognized when risks and rewards transfer. For services and construction contracts, revenue is recognized by stage of completion. Interest, royalties and dividends are recognized on an accrual basis. If payment terms constitute financing, revenue is the present value of expected receipts. Disclosures include revenue sources and construction contract details.

Uploaded by

VanityHugh
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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REVENUE

Section 23

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

PFRS for SMEs and Full PFRS


Share the same principles for the recognition of revenue from:
Sale of goods Rendering of services Use of an entitys assets by others:
Interest Royalties Dividends received

Construction contracts

Illustration:
Bicycle shops sells new and used bicycles and rents bicycles. This year it sold the land and building for one of its shops, which was closed.
It has 3 types of revenue: Sale of new bikes, Sale of used bikes, and Rentals. The proceeds from selling the land and building are not revenue (not ordinary); instead, this is presented net as a gain or loss.

Measurement:
Fair value of the consideration received or receivable.

Fair value of the consideration received takes into account:

Trade discounts
Prompt settlement discount or the cash discounts Volume rebates

Revenue is Deferred
If deferral is normal credit terms, revenue = contract amount (no discounting)
But if deferral constitutes a financing transaction, revenue = present value of all expected receipts. Discount rate is either: Prevailing rate for similar instrument Implicit interest rate that discounts cash flows to current cash sale price

Illustration:
We sell goods costing 1,500,000 for 2,000,000 due in 2 years interest free. Current cash price would have been 1,652,893.
Financing transaction. Up front revenue is 1,652,893. Profit is 152,893. =
(1+ %)

1,652,893 =

2,000,000
(1+ )2

i = 10%, by solving the equation.

Illustration (Continued):
Interest income year 1 = 1,652,893 x 10% = 165,289, unpaid, bringing receivable up to 1,818,182.
Interest income year 2 = 1,818,182 x 10% = 181,818, bringing receivable up to 2,000,000, which is then repaid.

Illustration (Continued):
Jan. 1, 20A Accounts Receivable
Revenue Dec. 31, 20A Accounts Receivable Interest revenue Dec. 31, 20B Accounts Receivable Interest revenue Cash 2,000,000 181,818 181,818 165,289 165,289

1,652,893
1,652,893

Accounts Receivable

2,000,000

Sale of Goods:
The entity has transferred to the buyer the significant risks and rewards of ownership of goods; and
The entity retains neither continuing managerial involvement nor effective control over the goods sold.

Rendering of Services:
Recognize revenue based on stage of completion when the outcome of the transaction can be estimated reliably.
Straight line if many service acts.

Cost recovery method when outcome cannot be estimated reliably.

Use by Others of an Entitys Assets:


Interest
Interest is recognized using the effective interest method. Royalties

Royalties are recognized on an accruals basis in accordance with the substance of the relevant agreement.
Dividends Dividends are recognized when the shareholders right to receive payment is established.

Construction Contracts:
Recognize revenue based on stage of completion when the outcome of the transaction can be estimated .
Cost recovery method when outcome cannot be estimated reliably.

Construction Contracts: Ways to Estimate Stage of Completion


Based on inputs: % of costs incurred to estimated total costs.
Based on outputs: Engineering survey of work performed.

Physical portion of work that has been completed (e.g. km of road paved).
Exclude costs incurred for future activities (e.g. materials inventory and prepayments).

Illustration:
Contract signed 20A for 2,000. Initial cost estimate is 1,200. In 20A cost incurred 800. Estimated additional cost 400.
For 20A: % complete based on costs = 800 / 1,200 = 66.7%. Revenue = 2,000 x .667 = 1,333. Cost = 800. Profit = 533. For 20B: Contract finished middle of 20B. Total cost = 1,250. Revenue 667. Cost = 450. Profit = 217.

Construction Contract: Construction Contracts where the Outcome Cannot be Estimated Reliably
Use cost recovery method:
Recognize revenue only to the extent of costs incurred whose recovery is probable

Recognize contract costs as expense when incurred

Construction Contracts: Other Points


Costs whose recovery is not probable are an immediate expense
If a contract will probably result in a loss, immediately recognize the loss and a provision (onerous contract Section 21)

Illustration:
Fixed price, 5-year contract for 100,000. Year 1, 5,000 costs incurred. Unable to estimate additional costs but (a) loss is unlikely and (b) collectability is highly probable.
Use cost recovery method In Year 1 revenue of 5,000, costs of 5,000, profit of 0

Disclosures:
Accounting policies for revenue recognition Amount of revenue for each category: Sale of goods Rendering of services Interest Royalties Dividends Commissions Government grants

Any others

Disclosures: Contract
Additional disclosures for construction contracts: Revenue recognized Method for determining revenue Method for determining stage of completion Gross amount due from customers (asset) Gross amount due to customers (liability)

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