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REVENUESection 23
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Revenue
The gross inflow of economic benefits during the period aris
course of the ordinary activities of an entity when those inf
in increases in equity, other than increases relating to contrib
from equity participants.
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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
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Illustration:
Bicycle shops sells new and used bicycles and rents bicy
This year it sold the land and building for one of its shops
was closed.
It has 3 types of revenue: Sale of new bikes, Sale of used bike
Rentals. The proceeds from selling the land and building are not revenu
ordinary); instead, this is presented net as a gain or loss.
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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
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Revenue is Deferred
If deferral is normal credit terms, revenue = contract amount
discounting)
But if deferral constitutes a financing transaction, revenue = p
value of all expected receipts. Discount rate is either:
Prevailing rate for similar instrument
Implicit interest rate that discounts cash flows to current
price
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Illustration:
We sell goods costing 1,500,000 for 2,000,000 due in 2 yea
interest free. Current cash price would have been 1,652,89
Financing transaction. Up front revenue is 1,652,893. Profit
152,893.
=
(1+ %)
1,652,893 =2,000,000
(1+ )2
i= 10%, by solving the equation.
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Illustration (Continued):
Interest income year 1 = 1,652,893 x 10% = 165,289, unpaid
receivable up to 1,818,182.
Interest income year 2 = 1,818,182 x 10% = 181,818, bringin
receivable up to 2,000,000, which is then repaid.
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Illustration (Continued):
Jan. 1, 20A Accounts Receivable 1,652,893
Revenue 1,652,8
Dec. 31, 20A Accounts Receivable 165,289
Interest revenue 165,289
Dec. 31, 20B Accounts Receivable 181,818
Interest revenue 181,818
Cash 2,000,000
Accounts Receivable 2,000,0
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Sale of Goods:
The entity has transferred to the buyer the significant risks an
rewards of ownership of goods; and
The entity retains neither continuing managerial involvement
effective control over the goods sold.
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Rendering of Services:
Recognize revenue based on stage of completion when the o
of the transaction can be estimated reliably.
Straight line if many service acts.
Cost recovery method when outcome cannot be estimated re
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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 accorda
the substance of the relevant agreement.
Dividends
Dividends are recognized when the shareholders right to
payment is established.
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Construction Contracts:
Recognize revenue based on stage of completion when the o
of the transaction can be estimated .
Cost recovery method when outcome cannot be estimated re
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Construction Contracts: Ways to EstimStage 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
paved).
Exclude costs incurred for future activities (e.g. materials inve
and prepayments).
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Illustration:
Contract signed 20A for 2,000. Initial cost estimate is 1,20
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
Revenue 667. Cost = 450. Profit = 217.
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Construction Contract: Construction Contwhere the Outcome Cannot be EstimatedReliably
Use cost recovery method:
Recognize revenue only to the extent of costs incurred wh
recovery is probable
Recognize contract costs as expense when incurred
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Construction Contracts: Other Points
Costs whose recovery is not probable are an immediate expe
If a contract will probably result in a loss, immediately recogn
loss and a provision (onerous contractSection 21)
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Illustration:
Fixed price, 5-year contract for 100,000. Year 1, 5,000 cos
incurred. Unable to estimate additional costs but (a) loss
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
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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
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Disclosures: Contract
Additional disclosures for
construction contracts:
Revenue recognized
Method for determining revenue
Method for determining
completion
Gross amount due from
customers (asset)
Gross amount due to c
(liability)
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