Income is defined as increases in economic benefits during an accounting period in the form of inflows or enhancements of assets. There are two types of income: revenue, which arises from ordinary business activities, and gains, which represent other types of income. Income is recognized when it is probable future benefits will flow to the entity and the income can be reliably measured. Revenue is measured at the fair value of consideration received or receivable, with some exceptions if payments are deferred or goods exchanged are of similar nature. The document provides details on accounting standards related to revenue recognition and examples of calculating income from sales, including regular sales, installment sales, and repossessions.
Income is defined as increases in economic benefits during an accounting period in the form of inflows or enhancements of assets. There are two types of income: revenue, which arises from ordinary business activities, and gains, which represent other types of income. Income is recognized when it is probable future benefits will flow to the entity and the income can be reliably measured. Revenue is measured at the fair value of consideration received or receivable, with some exceptions if payments are deferred or goods exchanged are of similar nature. The document provides details on accounting standards related to revenue recognition and examples of calculating income from sales, including regular sales, installment sales, and repossessions.
Income is defined as increases in economic benefits during an accounting period in the form of inflows or enhancements of assets. There are two types of income: revenue, which arises from ordinary business activities, and gains, which represent other types of income. Income is recognized when it is probable future benefits will flow to the entity and the income can be reliably measured. Revenue is measured at the fair value of consideration received or receivable, with some exceptions if payments are deferred or goods exchanged are of similar nature. The document provides details on accounting standards related to revenue recognition and examples of calculating income from sales, including regular sales, installment sales, and repossessions.
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.
which the elements of the financial
statements are to be recognised and carried in the balance sheet and income statement. This involves the selection of the particular basis of measurement.
How do we measure income?
What are the different kinds of income? Par 74 defines that income encompasses both revenue and gains: (a) Revenue arises when there are increases in economic benefits that arise in the ordinary activities of an entities business. (b) Gains represent income other than revenues What may be considered ordinary in one entity, may not be in another. Ie. Stock Brokerage firms, Investment Companies). In actual practice, we determine things as Ordinary, depending on the primary purpose for which the business is established, found in the Articles of Incorporation, or in some cases, the BIR Registration.
When do we recognize income?
The Conceptual Framework dictates what principles should be met for income to be recognized: (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 Income must be either realized, or realizable. Realized- when goods or services are exchanged for cash or claims to cash Realizable - when assets are received in exchange are readily convertible to known amounts of cash or claims to cash Income must be measured with reliability Measurement is the process of determining the monetary amounts at
Revenue should be measured at the
fair value of the consideration received or receivable. [IAS 18.9]. When the fair value of the goods or services received cannot be measured reliably, the revenue is measured at the fair value of the goods or services given up, adjusted by the amount of any cash or cash equivalents transferred.[IAS 18.12] If the inflow of cash or cash equivalents is deferred, the fair value of the consideration receivable is less than the nominal amount of cash and cash equivalents to be received, and discounting is appropriate. This would occur, for instance, if the seller is providing interest-free credit to the buyer or is charging a below-market rate of interest. Interest must be imputed based on market rates. [IAS 18.11] An exchange for goods or services of a similar nature and value is not regarded as a transaction that generates revenue. However, exchanges for dissimilar items are regarded as generating revenue. [IAS 18.12] Revenue recognition is discussed and covered by different IFRS. IAS 18 covers the Sales of Goods, rendering of services, as well as interest, royalties and dividends. IAS 11 Construction Contracts IAS 17 Leases IAS 28 Dividends under the equity method IFRS 4 Insurance Contracts IAS 39 Financial Instruments IAS 41 Agriculture
Further guidance to the revenue recognition
is governed by the Following Interpretations IFRIC 18 Transfers of Assets from Customers IFRIC 15 Agreements for the Construction of Real Estate (not yet applicable in the Philippines) IFRIC 13 Customer Loyalty Programmes IFRIC 12 Service Concession Arrangements SIC-27 Evaluating the Substance of Transactions in the Legal Form of a Lease SIC-31 Revenue Barter Transactions Involving Advertising Services Our discussion will just focus on IAS 18 and IAS 11
What are types of Sale?
Regular Sales Installment Sales
REVENUE RECOGNITION FOR IAS 18 AND IAS
11 In general, we should use the full accrual method of accounting. When income recognition principles are met, income should be recorded at once. However, there are instances, (particularly on the installment sales type) when there is doubt on the collection of the sales price, over the long run. In such cases, to apply reasonable conservatism, we have to depart from the full accrual method and recognize revenues during in relation to the Time of Collection (to differentiate refer to Problem I on page 269). However, IFRS has a weakness, and that is to provide exact guidelines for the grey areas in accounting recognition. For such cases, judgment needs to be applied, and the rationale should be adequately disclosed in the financial statements of the company. Unlike the IFRS, US GAAP provides for a clearer accounting treatment. They include the following revenue recognition:
Cost recovery (Gross Profit is deferred
(DGP- Liability) until the year full costs have been recovered. If such is the case, total collections made in excess of the full costs are to be recognized as Realized Gross Profit, until exhausted. Proceed to Problem XV on Page 274) Installment Sales (Realized Gross Profits are recognized in proportion to the level of collection. Problem III on page 269) Cash Method (all costs are recognized immediately, while revenue is recognized every time there is collection).
What are the common questions in Problem
Solving? 1. 2. 3. 4. 5. 6.
Realized Gross Profit Current Year
Total Realized Gross Profit Realized Gross Profit To date Deferred Gross Profit, Ending Deferred Gross Profit, Beginning Installment Accounts Receivable, Ending 7. Installment Sales for the Year 8. Cash Collections for the Year 9. Cash collections year to date 10.Gain / Loss on Repossession 11.Net Value of Repossessed inventory Problem V Page 270
How do we determine the fair value at date
of Repossession? We follow PAS 2, since it will become part of our Inventory. For listed prices (there is an existing published rates/prices), valued at Estimated Selling Price less costs to sell, which include reconditioning costs and other costs related to resale . For unlisted prices, should be reduced further by Normal Gross Profit. (Problem VI Page 270) Trade-Ins Merchandise are recorded at the NRV. Over or underallowances are increases and decreases to the Installment Sales balance. Problem VII 270)