The Revenue Recognition Principle is the concept of how the revenue should be recognized in the entity’s Financial Statements.
Revenue Recognition could be different from one accounting principle to another principle and one standard to another standard. For example, based on a cash basis or cash accounting principle, revenue is recognized in the Financial Statements when cash is received.
However, accrue accounting principles, the revenues are recognized when the transaction has occurred.
If the Financial Statements are prepared based on IFRS, the revenue is recognized at the time risks, and rewards of the selling transactions are transferred from the seller to the buyer.
IFRS use accrual principle in Revenue Recognition.
In this article, we discuss Revenue Recognition under the accrual basis of IFRS.
Measurement of Revenue:
Once you can identify the time frame that revenue should recognize based on Revenue Recognition Principle, you should then decide what amount of those transactions should be recognized.
Under IAS 18, in case your financial statements are prepared based on IFRS, the revenue should be measured at the value of the fair value of consideration expected to receive or the changeable value of goods or services.
For example, if you sell a car amount of $50,000 to your customer, then $50,000 is what you expected to receive.
However, if the consideration of the amount that is expected to receive is deferring and leading to a difference from its nominal amount, then the revenue should be discounted.
Recognition of Revenue:
Well, to be more specific, the following are the key criteria that you could recognize and record revenue into Financial Statements based on Revenue Recognition Principle (IFRS: IAS 18):
- There is probable that there will be an inflow of economic benefit regarding the revenue being recognized. In this case, you have to prove that the company will get the benefit economically from the sale of goods or render or services.
- The amount of revenue being recognize is measurable. For example, the care amount $50,000 and we can see the value of this car in the market.
Unless your revenue is recognized meeting these two criteria; otherwise, you are not allowed to record revenue in Financial Statements base on Revenue Recognition Principle.
Sale of Goods:
Under the Revenue Recognition Principle, the venue could be recognized in the financial statements related to the sale of goods when meeting the following criteria:
- The risks and rewards related to goods are transfer and the seller does not retain any control on the goods sold.
- The number of goods could measure reliably
- The economic of goods will be inflow to the company
- The associate expenses relate to the goods is measured reliably.
Rendering of Services:
Under the Revenue Recognition Principle, the venue could be recognized in the financial statements related to the rendering of services when meeting the following criteria:
- The value of service could be measured reliably
- The probably economic benefit related to service will be inflow into the company
- Stage of completion of service could be measured reliably
- Cost related to service could be measured reliably
Comment below if you have any questions related to Revenue Recognition Principle.