Wednesday, 6 August 2014

Condition for revenue recognition under IAS 18

Internation accounting standard 18 sets out five criteria that should be met before revenue on the sale of goods ought to be recognised. The five standards are that;

1. the significant ‘risks in addition to rewards’ of ownership are transferred from the seller towards the buyer. In a simple scenario this is when the legal title or actual possession with the goods passes between both the parties. The retention of simple risks and rewards would not necessarily prevent the recognition with the revenue. This might function as the case in the retail industry where an item may be returned along with a refund provided;

2. The seller no longer has operations involvement or effective control in the goods;

3. The level of the revenue can always be measured reliably;

4. It truly is probable that payment for the goods will be received because of the entity. The effect ofthis is actually that the revenue pertaining to credit sales is identified before actual payment is actually received; and the fees incurred, or to always be incurred, in relation towards the transaction can be tested reliably.

It may be tough to estimate the costs pertaining to a transaction in specific circumstances; however that won't prevent a reliable appraisal being made, and therefore should not stop revenue being identified. The provision of a warranty is anexample in this. If, however, it is just not possible to estimate reliably the costs to beincurred, this precludes the recognition of revenue and for that reason any payment received ought to be recognised as a legal responsibility.

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