To start with the top line, IAS 18 Revenue is the basic standard that determines the sales number, and excludes from its scope revenue recognition that is dealt with in specific standards such as IFRS 9 Financial Instruments, IAS 17 Leases and IAS 41 Agriculture. The standard defines as revenue anything that increases an entity’s assets or decreases its liabilities. It says that: ‘Revenue is recognized when it is probable that future economic benefits will flow to the entity and these benefits can be measured reliably’.
This principle is expanded to note that revenue is recognized when the entity has transferred to the buyer the significant risks and rewards of ownership of the goods. The entity must have neither ‘continuing managerial involvement’ nor control of the goods. When the sale relates to the provision of services, the standard specifies that revenue is recognized in relation to a stage of completion of a contract. This is subject to being able to identify such a stage reliably, costs being identified reliably and measurable future benefits being likely. Construction contracts are dealt with in a separate standard, discussed below.
The basic approach on measurement is that the transaction should be measured at fair value, and the standard specifies that this is normally the value of the consideration received. However, it cannot be assumed that the consideration is always fair value. One particular case where the consideration is not the transaction ...