IAS 18 – Revenue

1 Revenue

Many of us already have an impression what revenue is and if asked about it many will say that revenue is income of the business which is not wrong. But revenue is not the only kind of income that business earns so we must have clear understanding about what revenue exactly is and what other kinds of incomes are. Also we must have set of criteria through which we can analyse when revenue and other incomes can be recognized in the financial statements.

All such issues specifically related to Revenue are tackled under IAS 18 Revenue

1.1 IASB Framework about revenue

In IASB framework one of FIVE elements of financial statements defined is Income. The definition of income encompasses both revenue and gain and interestingly framework has discussed each of them in good detail.

Revenue is the income that arises in the course of the ordinary activities of an entity i.e. activities which are basically business of the entity and this is for what entity has been formed and exists. In simple words income earned from such activities which are the main business of the entity is Revenue.

This can have different names in different types of business including sales, fees, interest, dividends, royalties and rent.

Gains are such income that may, or may not, arise in the course of the ordinary activities of an entity.

From the definition of gains we can understand two things:

  1. gains are not earned on regular basis; and
  2. gains are such income that may arise out of such activities which may be ordinary or not ordinary in nature.

In simple words gains are such incomes which arises from such activities which are not the main business of the entity but they may or may not be ordinary in their nature.

2 Revenue as per IAS 18

IAS 18 has prescribed the accounting treatment of revenue after defining material in more detail and giving it more depth.

2.1 What is Revenue? – IAS 18

Revenue is the gross inflow of economic benefits (received and receivable) 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.

Let’s analyse the definition part by part.

Revenue is:

Gross inflow of economic benefits i.e. revenue has not been set-off against the cost incurred to generate such revenue

Received and receivable i.e. revenue is recognized on accrual basis just like other elements of financial statements

During the period i.e. over a range of time

Arising in the course of ordinary activities i.e. such activities are undertaken on regular basis as the main business of the entity

When those inflows results in increases in equity i.e. such inflows generated from activities should increase the equity

Other than increases relating to contributions from equity participants i.e. such increase is not an increase that is a result of additional capital invested by the owners in the company