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Initial recognition
The general revenue recognition criteria apply to
the recognition of other revenue . Revenue may be recognised when:
| a) |
it is probable
that the economic benefits associated with the
transaction will flow to the entity [IAS18R.29(a)];
and |
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| b) |
the amount of revenue can be measured
reliably [IAS18R.29(b)]. |
More specific recognition guidance is set out below
for key items of other revenue.
Interest income
An entity should recognise interest income using
the effective interest method. [IAS 39R.9, AG5-AG8, IAS18R.30(a)]. The effective interest rate
is the rate that exactly discounts estimated future
cash payments or receipts through the expected life
or duration of the financial instrument to the net
carrying amount of the financial asset or financial
liability. The estimated cash flows include all
contractual terms of the financial instrument (for
example, prepayment, call and similar options) but
exclude future credit losses. The calculation includes
all fees and points paid or received that are an
integral part of the effective interest rate, transaction
costs, and all other premiums or discounts. [IAS39R.9].
The actual rate of interest a lender charges may
or may not be the same as or different from the
effective rate. These rates are different where
the initial carrying amount (fair value) of a financial
asset differs from its face value or amount to be
received at maturity .
Certain transactions may include elements both
of interest and other financial service fees. For
these transactions, an entity must differentiate
between fees that are part of the asset's effective
yield, fees that are earned as services are provided
and fees earned on the execution of a significant
act. Reviewing a borrower's credit rating or registering
charges, for example, are necessary and integral
parts of the lending process. Fees for performing
such services should be deferred and recognised
as an adjustment to the effective yield [IAS18R
Appendix 14(a)(i)] . Commitment fees
should be considered in the effective yield on an
asset when it is probable that the transaction will
take place and the commitment is not a derivative
under IAS 39R. The fee should be recognised as revenue
on expiry if the commitment expires without the
transaction having taken place [IAS18R Appendix 14(a)(ii)].
Dividends
Cash dividends
Dividend income should be recognised when a shareholder's
right to receive payment is established [IAS18R.30(c)].
Dividends may be recognised at the date they are
declared, depending on local laws. Dividends declared
by directors but which do not require shareholder
approval should be recognised from the date on which
the directors make their irrevocable declaration.
Dividends that are proposed by directors but require
approval by shareholders should not be recognised
until the shareholder approval has been given [IAS10R.12-13]
. Dividends sometimes arise from
pre-acquisition earnings. These dividends should
be deducted from the cost of the entity's investment
[IAS18R.32] .
Non-cash dividends
Some listed companies arrange for ordinary shareholders
to elect to receive their dividends in the form
of additional shares rather than in cash. The share
equivalent is sometimes referred to as a scrip dividend
or a stock dividend, and consists of shares issued
and fully paid up. The receipt of scrip dividends
is in substance the receipt of a cash dividend,
with a simultaneous reinvestment of the proceeds
in the issue of new shares. Revenue arising from
the scrip dividend that is in lieu of cash should be recognised on the same
basis as that for a cash dividend; dividend in shares that is in substance a form of share split,
or bonus shares is not recognised as revenue.
Royalties
Royalty revenue arises from the sale of rights to
use an intangible asset, often for a defined period
of time [IAS18R.5 (b)]. The rights are generally
long-term. Examples include rights to use films
and software.
The costs associated with the supply of these rights
are normally substantially incurred before the period
of use commences. The costs incurred during the
period of use are often minimal. Royalty revenue
should be recognised on an accrual basis in accordance
with the substance of the agreement [IAS18R.30(b)].
Revenue is earned over the course of the contract
as the customer accesses the benefits of the asset
. Typically this will be on a straight-line
basis over the life of the agreement [IAS18R Appendix
20]. However, if the receipt of the revenue is contingent
on some future event, the revenue should only be
recognised when it is probable that revenue will
be received [IAS18R Appendix 20]. This may not be
until after the event has occurred
.
The sale of an indefinite right to use an intangible
asset with negligible post sales support, however,
would justify immediate recognition of revenue . Such a transaction is, in substance, more
like a sale of goods and if no material obligation
remains with the entity, there is no reason to defer
recognition of the revenue .
Government grants
Government grants may be of a capital nature, such
as a contribution towards the acquisition of an
asset , or of a revenue nature, for
example, a contribution to defray an expense, or
a mixture of both [IAS20R.3] . Grants
may be monetary or take the form of a transfer of
a non-monetary asset. Grants should be recognised
provided there is reasonable assurance that the
entity will comply with their conditions and the
grants will be received [IAS20R.7-11]. The basis
of recognition should match the grant with the related
costs. Compensation for past expenses or losses
or for immediate financial support should be recognised
in income in the period in which it becomes receivable
[IAS20R.12-22] .
Government grants are sometimes received as part
of a package to which a number of conditions are
attached. Management should evaluate these conditions
to determine whether they give rise to constructive
or legal obligations that should be recognised as
liabilities .
Insurance recoveries
A potential insurance recovery is an example of
a contingent asset [IAS37R.10] .
Contingent assets are not recognised in the financial
statements, since this may result in the recognition
of revenue that will not be realised [IAS37R.31-34]
. Only when it becomes virtually
certain that an insurance claim will result in an
inflow of economic benefits are the asset and the
related revenue recognised in the financial statements
[IAS37R.35].
Initial measurement
Other revenue should be measured at the fair value
of the consideration received or receivable [IAS18R.9].
Interest income should be recognised using the effective
interest method as set out in IAS 39R.9 and 39R.AG5-AG8
[IAS18R.30 (a)]. Non-cash revenue derived from a
government grant, or a scrip dividend should be
measured at fair value. In the case of the government
grant this would be the fair value of a non-monetary
asset, and for a scrip dividend the cash equivalent
of the dividend.
Other revenue is usually recognised at its nominal
amount, as it is not normally deferred beyond one
accounting period and the impact of discounting
is therefore not material.
Presentation
Items of other revenue are usually presented in
the income statement as other operating income . Government grants
related to income may alternatively be deducted
in reporting the related expense [IAS20R.29-31].
Disclosure
An entity should disclose:
| a) |
its revenue recognition
policies, including those relating to items
of other revenue [IAS18R.35(a)] [IAS20R.39(a)];
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| b) |
the nature and extent of government grants
recognised in the financial statements [IAS20R.39(b)]; |
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| c) |
any unfulfilled
conditions or other contingencies attaching
to government assistance that has been recognised
[IAS20R.39(c)]; and |
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| d) |
separate disclosure
should be made of revenue arising from the provision
of services and royalty revenue [IAS18R.35]. |
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