When it comes to revenue recognition standards, IFRS IAS 18 comes to mind. It was a big factor in determining how businesses report their income. It is all about when and in what manner companies could record revenue in the books. The primary goal is to ensure that reported revenue accurately reflects what businesses actually earned. Now, many are asking, “Is IAS 18 still in force?” No, because IFRS 15 has been replaced. Nevertheless students, accountants and auditors still need to understand. It enables them to understand the historical context of revenue rules and provides a solid grounding for learning new standards.
What is IFRS IAS 18?
One of those, like going back to the start. This rule told companies when they could take credit for revenues in their financial statements. It extended to the sale of products, provision of services and receipt of interest, royalties and dividends. Under the new codification, companies must record the revenue when:
- The risks and rewards of the goods had passed.
- The income could be quantified dependably.
- It was likely that the business would receive the economic rewards.
This standard wanted the recorded revenue to be consistent, making businesses in the world speak the same accounting language.
Scope of IAS 18
The scope of IAS 18 covered three principal categories of revenue:
- Sale of Goods
- Rendering of Services
- Others’ use of entity rights (such as interest, royalties, and dividends)
It did not apply to
- Lease agreements
- Insurance contracts
- Fair value gains/losses on financial instruments
- Agricultural activity
It is also very crucial to realize its extent, as some contemporary standards such as IFRS 15 have widened its horizon.
IAS 18 Revenue Recognition
IAS 18 Revenue Recognition sets the criteria and implementation guidance on how to account for the revenue arising from certain types of transactions and events. There were no concepts of ultimate reality in the IAS 18 revenue recognition to justify that the revenue to be recognized from revenue recognition came from a very solid event. For students and accountants, every rule had to be verified before being logged.
Sale of Goods
Sales of goods is the most typical revenue-producing activity in most companies. Companies required plain rules of the road they could use to figure out when to book their revenue. Sales of merchandise were recorded when:
- Other risks and rewards are transferred.
- The products were then no longer under the company’s control.
- The revenue figure was readily quantifiable.
- Payment was probable.
Rendering of Services
The fees for services to be rendered were accounted for, based on stage of completion. This is known as the ”percentage of completion method.” This mandated that companies calculate how much was accomplished until the date of the report.
Interest, Royalties and Dividends
Finally, interest, royalties, and dividends are income derived from the use or lending of company resources. They provide passive income in one way to companies. By knowing when to record them, companies can use them to reflect an accurate financial picture.
- Interest: Classified as per the effective interest method
- Royalty: Recorded on an accrual basis.
- Dividends: Declared when payment became due.
| Revenue Type | Condition for Recognition | Example |
| Sale of Goods | Transfer of risks & rewards | Selling a car |
| Services | Stage of completion | Construction project |
| Interest | Time basis | Bank savings interest |
| Royalties | Accrual basis | Book royalty earnings |
| Dividends | Right to receive | Shareholder dividends |
IAS 18 vs IFRS 15: The Key Differences
The process regarding revenue recognition changed considerably with the introduction of IFRS 15 and the discard of IAS 18. Both set standards for when and how companies should record income. But each operates in very different ways. It is important for students and professionals to grasp these changes in order to apply the correct rules.
Main Differences
- A Single Framework: There is only one five-step model in IFRS 15 that applies to all revenue. IAS 18 applied separate principles for the sale of goods, the provision of certain services, and the sale of certain interests.
- Contract Focus: IFRS 15 is about contracts with customers. IAS 18 was more transaction-type based.
- Performance Obligations: IFRS 15 disaggregates contracts into commitments known as “performance obligations.” IAS 18 did not include such a principle.
- Measurement: Revenue is measured in terms of IFRS 15 transaction price that is assigned to each obligation.
Why the Change?
IAS 18 was not clear or consistent for more complex transactions such as software sales. Those gaps are erased, and international reporting is made stronger and clearer under IFRS 15.
Does IAS 18 Still Apply to Date?
Understanding whether IAS 18 is currently in use for both students and the people practicing it is essential. It was followed for years by many companies. Today, you might still see old financial reports and contracts referring to IAS 18, so it’s nice to be familiar with this standard. Several students and readers have been wondering whether “IAS 18 is still in force.” The answer is “No.”
Timeline
- IFRS 15 replaced IAS 18 on 1 January 2018.
- No financial statements should be prepared using IAS 18 after that date.
But if you are working with older contracts or performing historical financial statement analysis, you still need to understand IAS 18.
It is important to know the old standards, as it helps
- Compare statements in different years.
- Studying for history of accounting finals.
- Understand the evolution of accounting standards more clearly.
IFRS 18 Illustrative Examples
Understanding the principles of revenue recognition under IAS 18 is easy, if you get the concept of examples. For theory-to-practice connection, examples from practice are often sought by students. Although there is no IFRS 18, practical examples from IAS 18 make it easier to understand.
Sale of Goods Example
Think about a retailer selling furniture. A transfer of ownership occurs at the time when goods depart from the warehouse. So that moment is when revenue is recognized.
Service Rendering Example
A software company installs a software product. If installation lasts six months, they recognize revenue off the work they’ve done after each month.
Interest Income Example
Interest income is the funds received as a result of lending money or having interest-paying investments. An example is when a bank derives interest income from personal loans that it provides to clients.
IFRS 19: A Common Confusion
Numerous people who are not aware of the right term are using the term “IFRS 19”. No IFRS 19 on revenue recognition exists as of the challenging date.
Current Status
- There is no IFRS 19 on revenue as such.
- For revenue, IFRS 15 is the standard that is correct today.
- Always consult the newest IFRS checklist from standards bodies.
Relevance to ACCA Syllabus
Under ACCA FA (Financial Accounting) and ACCA FR (Financial Reporting) syllabus, students know about how revenue used to be accounted for under, which has now been replaced by IFRS 15. This structure fortifies consistency of financial statements and consistency of reporting around the world.
IFRS IAS 18 ACCA Questions
Q1: IFRS IAS 18 states that revenue will be recognized if :
A) Goods are advertised
B) Risks and rewards pass to the buyer
C) Invoice is raised
D) Gross income is recognized when the full contract amount is received from the customer
Answer: B
Q2: Income from services under IAS 18 is recognized applying:
A) Cost method
B) Stage of completion method
C) Cash basis
D) Deferred revenue method
Answer: B
Q3: Which one of the following is a concept outside the statement of IAS 18?
A) Dividends
B) Royalties
C) Insurance contracts
D) Sale of goods
Answer: C
Q4: Under IAS 18, royalty shall be recognized on:
A) Cash basis
B) Accrual basis
C) Fair value basis
D) Market value basis
Answer: B
Q5: IFRS 15 completely replaced IAS 18 on:
A) 1 January 2017
B) 1 January 2018
C) 31 December 2017
D) 1 January 2019
Answer: B
Relevance to US CMA Syllabus
Under the US CMA Part 1 syllabus financial reporting, candidates are expected to be familiar with IFRS rules. The study of IAS 18 offers an insight into how revenue is recognized in other countries under international practices. It compares such practices to those under US GAAP, and thus allows students to understand and interpret similar global financial statements.
IFRS IAS 18 US CMA Questions
Q1: What is the criterion for recognition of revenue under IAS 18?
A) Price must be uncertain
B) The likelihood of benefit should within the range of economic feasibility;
C) Inspection of goods by the purchaser
D) All merchandise must be delivered in person.
Answer: B
Q2: Under the provisions of IAS 18, the dividend income should be recorded as revenue as follows:
A) Paid in cash
B) The right of payment is determined
C) Shares are sold
D) Tax is paid
Answer: B
Q3: How should revenue attributable to service contracts be accounted for in terms of IAS 18?
A) At contract signing
B) Percentage of completion method
C) Upon full service delivery
D) Once we receive your payment in full
Answer: B
Q4: Under IAS 18, on what basis is income from interest recognized?
A) Effective interest method
B) Simple interest method
C) Compound interest method
D) Flat rate method
Answer: A
Q5: IAS 18 focuses mainly on:
A) Revenue recognition
B) Inventory valuation
C) Cost capitalization
D) Risk management
Answer: A
Relevance to US CPA Syllabus
CPA candidates study IFRS vs GAAP in FAR. IAS 18 is a critically important concept in revenue recognition, so commanding a thorough understanding of the purpose of the IFRS 15 standard will help contribute towards their global accounting knowledge.
IFRS IAS 18 US CPA Questions
Q1: What is an important condition for recognizing revenue under IAS 18?
A) Invoice is issued
B) The risks and rewards are transferred in substance.
C) Customer approval received
D) Goods are in transit
Answer: B
Q2: Which item does IAS 18 cover?
A). Disposal of agricultural output
B) Fair value adjustments
C) Royalties earned
D) Operating lease accounting
Answer: C
Q3: Under IAS 18, revenue from services is recognized by reference to:
A) Cost incurred
B) Billing date
C) Percentage of completion
D) Contract signing
Answer: C
Q4: The fair value under IAS 18 is calculated at:
A) Replacement cost
B) Value agreed by customer
C) That received or receivable in consideration
D) Price of other goods in the market
Answer: C
Q5: One of these is that IFRS 15 had superseded IAS 18 to issue:
A) Asset classification rules
B) A model that is used to recognize five types of revenues.
C) New taxation methods
(D) Classification of financial instruments
Answer: B
Relevance to CFA Syllabus
CFA Level 1 exam takers should understand how revenue impacts financial statement analysis. IAS 18 provides historical context for ratio analysis and valuation comparisons for anyone studying entities with statements prior to 2018.
IFRS IAS 18 CFA Questions
Q1: For sales of goods, revenue is recognised under IAS 18 when:
A) Payment is received
B) Transfer of risk and rewards to buyer
C) Goods are produced
D) Order is confirmed
Answer: B
Q2: How do you recognize service revenue under IAS 18?
A) Deferred method
B) Installment method
C) Completion Method of Percentage of Completion
D) Full contract value method
Answer: C
Q3: Interest income is accounted for under IAS 18 as follows:
A) Payment date
B) Effective interest rate
C) Nominal rate
D) Market interest rate
Answer: B
Q4: Why should CFA candidates and charterholders care about IAS 18?
A) To understand the trend/revenue pattern in historical financials
B) For tax compliance
C) In the construction of investment portfolios
D) For treasury management
Answer: A
Q5: Under IAS 18, dividends are treated as income when:
A) Announced by company
B) Declaring or right to receive is recorded
C) Payment is received
D) Tax is deducted
Answer: B
