Financial Reporting Standard 118 – Revenue

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The objective of this Standard is to prescribe the accounting treatment of revenue arising from certain types of transactions and events.

  • The primary issue in accounting for revenue is determining when to recognise revenue. Revenue is recognised when it is probable that future economic benefits will flow to the entity and these benefits can be measured reliably.  
  • FRS 118 identifies the circumstances in which these criteria will be met and, therefore, revenue will be recognised. It also provides practical guidance on the application of these criteria. 

Tabulate below in summary, the revenue recognization methodology under FRS 118:- 

 

Type Of Revenue

 

  

Criteria to be met before recognizing as Revenue
 

Sale of goods

 

  

Revenue from the sale of goods shall be recognised when all the following conditions have been satisfied:

  • the entity has transferred to the buyer the significant risks and rewards of ownership of the goods;
  • the entity retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold; 
  • the amount of revenue can be measured reliably; 
  • it is probable that the economic benefits associated with the transaction will flow to the entity; and 
  • the costs incurred or to be incurred in respect of the transaction can be measured reliably.

 
 

Rendering of services

  

When the outcome of a transaction involving the rendering of services can be estimated reliably, revenue associated with the transaction shall be recognised by reference to the stage of completion of the transaction at the balance sheet date. The outcome of a transaction can be estimated reliably when all the following conditions are satisfied:

  • the amount of revenue can be measured reliably;
  • it is probable that the economic benefits associated with the transaction will flow to the entity;
  • the stage of completion of the transaction at the balance sheet date can be measured reliably; and
  • the costs incurred for the transaction and the costs to complete the transaction can be measured reliably.

 
 

Interest, royalties and dividends

  

 Revenue shall be recognized on the following bases:

  • interest shall be recognized using the effective interest method as set out in FRS 139, paragraphs 9 and AG5-AG8;
  • royalties shall be recognized on an accrual basis in accordance with the substance of the relevant agreement; and
  • dividends shall be recognized when the shareholder’s right to receive payment is established.

DISCLOSURE REQUIREMENT UNDER FRS 118:- 

FRS 118 requires an entity to disclose as follows:

(a)  the accounting policies adopted for the recognition of revenue, including the methods adopted to determine the stage of completion of transactions involving the rendering of services;

(b)  the amount of each significant category of revenue recognized during the period, including revenue arising from:

(i) the sale of goods;

(ii) the rendering of services;

(iii)  interest;

(iv) royalties;

(v) dividends;

( c) the amount of revenue arising from exchanges of goods or services included in each significant category of revenue

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