Question

1- Concept and scope sale of goods as per IAS 18? detaild explination at least 5 lines

2- Recognition of revenue from rendering of services? detaild explination at least 5 lines  

3- revenue recognition of software companies, ( with example)? detaild explination at least 5 lines + the example

4- Principles of revenue recognition for Airline Companies ( with example)? detaild explination at least 5 lines + the example of any airline company

5- explain and define in detailed the construction contract? detaild explination at least 5 lines

Answer 1

1.

The objective of IAS 18 is to prescribe the accounting treatment for revenue arising from certain types of transactions and events.

Recognition of revenue

Recognition, as defined in the IASB Framework, means incorporating an item that meets the definition of revenue (above) in the income statement when it meets the following criteria:

• it is probable that any future economic benefit associated with the item of revenue will flow to the entity, and
• the amount of revenue can be measured with reliability

IAS 18 provides guidance for recognising the following specific categories of revenue:

Sale of goods

Revenue arising from the sale of goods should be recognised when all of the following criteria have been satisfied:

• the seller has transferred to the buyer the significant risks and rewards of ownership
• the seller 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 seller, and
• the costs incurred or to be incurred in respect of the transaction can be measured reliably

2.

Rendering of services

For revenue arising from the rendering of services, provided that all of the following criteria are met, revenue should be recognised by reference to the stage of completion of the transaction at the balance sheet date (the percentage-of-completion method): [IAS 18.20]

• the amount of revenue can be measured reliably;
• it is probable that the economic benefits will flow to the seller;
• the stage of completion at the balance sheet date can be measured reliably; and
• the costs incurred, or to be incurred, in respect of the transaction can be measured reliably.

When the above criteria are not met, revenue arising from the rendering of services should be recognised only to the extent of the expenses recognised that are recoverable (a "cost-recovery approach".

3.

Revenue Recognition For Software Companies

The primary authority for software revenue recognition is AICPA Statement of Position (SOP) No. 97-2, Software Revenue Recognition, which is the result of about 12 years of development work from 1985 through 1997. It applies to both public companies (according to SAB 104) and private enterprises.

Under SOP 97-2, recognition of revenue generally occurs at delivery if a four-part conjunctive test is met. Software delivery should be straightforward and require no special production, modification, or authorization by the software seller (vendor). The four-part conjunctive test is as follows:

Persuasive evidence of an arrangement exists. This means that a bona fide contract needs to exist (see Part 4, Legal Rules, regarding application of Article 2 of the Uniform Commercial Code [UCC] to this arrangement).

EXAMPLE
Software Vendor has two business models. The first is a premium model, whereby it sells (licenses) to large companies an out-of-the-box software solution bundled with a one-year agreement to provide post-contract customer support (PCS). The second is a standard model, whereby it offers its out-of-the-box software solution to smaller customers in a hosting environment. Software Vendor has seen that it has two classes of customers: 1) larger customers who buy its premium solution and 2) smaller customers who use the standard services. As part of its business practice and revenue recognition policy, Software Vendor requires a written sales agreement for the larger customers who buy the software; however, it only requires a purchase order from its smaller customers.

4.

Airline Industry

The revenue recognition policies varies based on nature of services provided by airline companies. Overall, the treatment of passenger and freight revenue is similar. To attract customer, the airline companies issues airline passenger tickets or freight airway bill in advance of the service or transportation date.

Further, the amount paid as air fare on booking air tickets has two components – refundable fare and non-refundable fare, the proportion of two varies with passage of time. All amount received in advance from prospective customer is accounted as unearned revenue.

• Passenger and freight revenue: On date of travel of the passenger or when freight is uplifted
• Non-refundable tickets: On the same date the ticket booking for flight is closed
• Limited refundable or exchangeable unredeemed tickets: significant time (determined based on historic trend) after the booked date of travel has lapsed or terms of the tickets
• Commission and discounts: Commission is recognized as expenses and discount is recognized as reduction in revenue, when the sale is recognized.

5.

AS 7 Construction Contract describes and lays out the accounting treatment in respect of the revenue and costs in relation to a construction contract. AS 7 Construction Contract is to be used in for the accounting of construction contracts in the financial statements of the contractors.

1. Types of Contracts : A. Fixed Price Contract B. Cost-plus Contract

2. Combining and Segmenting of Construction Contracts : I. Combining of Construction contracts  II. Segmenting of Construction contracts

3. Revenue from a Contract

The revenue from a contract includes the following to the extent it is probable of generating revenue and is measurable:

i. The initial amount of revenue agreed in the contract;

ii. Claims and incentives on account of variations in contract work;

4. Costs of a Contract

The cost of a contract includes the following:

i. Directly related costs that to the specific contract

ii. Costs which are generally attributable and allocated to the contract activities

iii. Other costs which are specifically chargeable to the customer under the terms of the contract