AS 18 Income is defined as the increase in economic benefits. This is achieved through increase in assets or decrease in liabilities. And this would ultimately result in the increase in equity. Revenue is income generated through: sales, fee, interest, dividends and royalties. Objective of AS 18 is to tell the accounting treatment of revenue. Revenue is recognized when it is certain that economic benefits would arise and if these benefits are measurable. Previous AS 18 was approved In 1982 and the new AS 18 supersedes it.
AS 18 does not deals with: 1) revenue arising from construction related activities. ) Dividends arising though equity method 3) Insurance contracts 4) Changes in the fair value of assets and liabilities 5) Changes in current assets 6) Changes in biological assets 7) Initial recognition of biological produce 8) Extraction of mineral ores FIRS 13 Fair Value Management Fair Value Management: Fair Value is the price received after selling an asset Fair Value is the price paid to pay off liabilities Only income earned by company on its own will be recognized as its revenue.
Revenue collected on behalf of a third party won’t be recognized as the revenue. Only commission will be considered as revenue. For example third party could be government, Dell (BBC relationship) Revenue shall be measured at the FAIR VALUE Incase there is a difference in the fair value and the nominal price then the Iterance wool 9. E ca EAI Interest Revenue Ana tans Is recognized as stated When there is an exchange of goods/services of similar kind than no revenue would be recognized, however if there is an exchange of goods/services or dissimilar type than the revenue is recognized.
Fair value would be recorded accordingly. This standard states that revenue through each transaction should be recognized however each transaction could also be broken down into components and thus revenue recorded accordingly. For example SAP sell HCI 1 million this may include the service cost of 5 years. The service cost would be broken down and recorded over a 5 years period. Study the Matching Concept (Point No. 9) SALE OF GOODS: Revenue from sale of goods is to be recognized only when: a) The entity has transferred to the buyer significant risks associated with the product being sold. I) Significant Risk (it) Insignificant Risk ) The entity has no longer managerial control over the goods sold it) The amount of revenue can be measured reliably iii) Economic benefits from the transaction will be realized is a surety iv) The costs incurred from the sale of goods are measured reliably Point no. 8 Revenue is only recognized if it is probable that the economic benefits will inflow into the entity. For instance if a company has entered into a deal with another company in another country for the supply of a certain product. However if it is not yet final that the respect company will allow the supply of the product so in such an uncertain tuition revenue will not be recognized.
Secondly if it is unsure that the respective company will pay the full amount due only the amount that is to be received for sure will be recognized as the revenue. The remaining amount will be recognized as expense. Example of Oil Company. Point no. 19 Revenue and expense relating to a transaction will be recognized at the same time when the transaction is recognized. For example if a product is sold with a warranty thus warranty would be immediately recognized as an expense along with the rest of the transaction.
However it should be noted that any revenue against which the expense that occurs and is not measurable will be recognized as a liability Rendering of Services The outcome of a transaction can be measured reliably when all the following contraltos are met: a) The amount of revenue can be measured reliably b) If it is probable that the economic benefits would flow into the entity c) Costs related to the transaction can be measured reliably d) Stage of completion at the end of the reporting period can be measured reliably Point no. 21 Percentage of Completion method.
Under this method revenue is recognized on the basis of stage of completion of a transaction. For every financial period ending revenue is accordingly entered as per the stage of completion of the transaction. AS 11 also supports this concept. Point 24 The stage of completion can be evaluated by one of the following methods: 1) Survey 2) ratio 3) percentage (amount completed to total amount of work) Point no 25 point 26,and 28 In case the outcome of a financial transaction cannot be measured reliably then the profit is not recognized, all those expenses that are certain to be recoverable will be agonized as revenue.
However I the outcome of a financial transaction cannot be measured reliably and it is not probable that the expenses will be recovered than the profit will not be recognized, there will be no revenue recognized and costs will be treated and recognized as expense. Interest, Royalties and Dividends Revenue generating from the above three would only be recognized when the respective revenue is reliably measurable and if the economic benefits will flow into the entity. And this would be done on the following basis: a)point AAA, bib and 30 c point 32
When an interest bearing investment is purchased only the interest that has been accumulated after the acquisition of the investment will be treated as revenue. Potent 33 Royalties will be treated as revenue according to the agreement finalized. Dolores An entity shall disclose the accounting policies used for the treatment of revenue and the method chosen to find out the stage of completion of a transaction. It shall also disclose the amount of each significant revenue recognized. In accordance with AS 37 it is important that the contingent assets and liabilities are disclosed. Effective date:l Jan 1995