International Standards of Revenue Recognition
"Revenue recognition" is the accounting principle of recording revenue when it is recognized, or earned. This is a cornerstone of accrual accounting, along with the matching principle. The International Financial Reporting Standards, set by the International Accounting Standards Board, has a subsection that deals with revenue recognition.
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Cash-Based Accounting
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There are two primary ways to track revenue. The first of these is cash-based accounting. In cash-based accounting, no matter when you delivered the service, you only record it when you receive the money. Because you don't record services as they happen, this method has been used to commit embezzlement and is illegal under most national and international standards.
Accrual-based accounting is where revenue recognition comes into play. With accrual-based accounting, revenue is recorded when it is earned, and the matching expense (for instance, the cost of the inventory sold) is also recorded at the same time, which is called the matching principle. This is the standard used around the world.
Definition and Measurement
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The IFRS defines revenue as the gross inflow of economic benefits from the ordinary operating activities of an entity. This means all the money that comes in before expenses, but only from the normal business activities of an entity. Anything else is recorded in a special nonoperating section as a gain.
Revenue should be recorded at the amount the service is worth or recognized. This is usually in the form of legal tender but can also be in the form of appraised trade goods. In addition, the exchange of two similar goods is not recognized as revenue.
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Recognition and Services
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Revenue is recognized, per IFRS, when all benefits of a good have been transferred to a new owner, as well as being able to measure the amount of revenue reliably. For selling goods, full transferral of ownership, as well as the seller absolving all responsibility over the goods sold, are also required. For services rendered, the degree of completion and cost incurred are required.
Interest, Royalties and Dividends
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In the cases of interest, royalties and dividends, all financial instruments, special rules apply, due to the less-tangible nature of their value. For interest, there is a specific set of rules put forth in IAS 39 (International Accounting Standards #39). For royalties, it depends on the specific agreement. For dividends, revenue is recognized when the shareholder's legal right to receive is is filed.
Disclosure
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In its periodical financial statements, a company must disclose how it recognizes revenue, as well as the amount of revenue due to sale of goods, rendering of services, interest, royalties and dividends. This establishes how much a company made, as well as how they calculated it, for examination by oversight boards, the public and investors.
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References
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