How is income defined?

Increases in economic benefits during the

accounting period in the form of inflows
or enhancements of assets or decreases
of liabilities that result in increases in
equity, other than those relating to
contributions from equity participants.

which the elements of the financial

statements are to be recognised and
carried in the balance sheet and
income statement. This involves the
selection of the particular basis of
measurement.

How do we measure income?

What are the different kinds of income?
Par 74 defines that income encompasses
both revenue and gains:
(a) Revenue arises when there are
increases in economic benefits that
arise in the ordinary activities of an
entities business.
(b) Gains represent income other than
revenues
What may be considered ordinary in one
entity, may not be in another. Ie. Stock
Brokerage firms, Investment Companies). In
actual practice, we determine things as
Ordinary, depending on the primary purpose
for which the business is established, found
in the Articles of Incorporation, or in some
cases, the BIR Registration.

When do we recognize income?

The Conceptual Framework dictates what
principles should be met for income to be
recognized:
(a) it is probable that any future economic
benefit associated with the item will
flow to or from the entity;
(b) the item has a cost or value that can
be measured with reliability
Income must be either realized, or realizable.
Realized- when goods or services are
exchanged for cash or claims to cash
Realizable - when assets are received
in exchange are readily convertible to
known amounts of cash or claims to
cash
Income must be measured with reliability
Measurement is the process of
determining the monetary amounts at

Revenue should be measured at the

fair value of the consideration
received or receivable. [IAS 18.9].
When the fair value of the goods or
services received cannot be measured
reliably, the revenue is measured at
the fair value of the goods or services
given up, adjusted by the amount of
any cash or cash equivalents
transferred.[IAS 18.12]
If the inflow of cash or cash
equivalents is deferred, the fair value
of the consideration receivable is less
than the nominal amount of cash and
cash equivalents to be received, and
discounting is appropriate. This would
occur, for instance, if the seller is
providing interest-free credit to the
buyer or is charging a below-market
rate of interest. Interest must be
imputed based on market rates. [IAS
18.11]
An exchange for goods or services of a
similar nature and value is not
regarded as a transaction that
generates revenue. However,
exchanges for dissimilar items are
regarded as generating revenue. [IAS
18.12]
Revenue recognition is discussed and
covered by different IFRS.
IAS 18 covers the Sales of Goods,
rendering of services, as well as
interest, royalties and dividends.
IAS 11 Construction Contracts
IAS 17 Leases
IAS 28 Dividends under the equity
method
IFRS 4 Insurance Contracts
IAS 39 Financial Instruments
IAS 41 Agriculture

Further guidance to the revenue recognition

is governed by the Following Interpretations
IFRIC 18 Transfers of Assets from
Customers
IFRIC 15 Agreements for the
Construction of Real Estate (not yet
applicable in the Philippines)
IFRIC 13 Customer Loyalty
Programmes
IFRIC 12 Service Concession
Arrangements
SIC-27 Evaluating the Substance of
Transactions in the Legal Form of a
Lease
SIC-31 Revenue Barter Transactions
Involving Advertising Services
Our discussion will just focus on IAS 18 and
IAS 11

What are types of Sale?

Regular Sales
Installment Sales

REVENUE RECOGNITION FOR IAS 18 AND IAS

11
In general, we should use the full accrual
method of accounting. When income
recognition principles are met, income
should be recorded at once. However, there
are instances, (particularly on the installment
sales type) when there is doubt on the
collection of the sales price, over the long
run. In such cases, to apply reasonable
conservatism, we have to depart from the
full accrual method and recognize revenues
during in relation to the Time of Collection (to
differentiate refer to Problem I on page 269).
However, IFRS has a weakness, and that is to
provide exact guidelines for the grey areas in
accounting recognition. For such cases,
judgment needs to be applied, and the
rationale should be adequately disclosed in
the financial statements of the company.
Unlike the IFRS, US GAAP provides for a
clearer accounting treatment. They include
the following revenue recognition:

Cost recovery (Gross Profit is deferred

(DGP- Liability) until the year full costs
have been recovered. If such is the
case, total collections made in excess
of the full costs are to be recognized
as Realized Gross Profit, until
exhausted. Proceed to Problem XV on
Page 274)
Installment Sales (Realized Gross
Profits are recognized in proportion to
the level of collection. Problem III on
page 269)
Cash Method (all costs are recognized
immediately, while revenue is
recognized every time there is
collection).

What are the common questions in Problem

Solving?
1.
2.
3.
4.
5.
6.

Realized Gross Profit Current Year

Total Realized Gross Profit
Realized Gross Profit To date
Deferred Gross Profit, Ending
Deferred Gross Profit, Beginning
Installment Accounts Receivable,
Ending
7. Installment Sales for the Year
8. Cash Collections for the Year
9. Cash collections year to date
10.Gain / Loss on Repossession
11.Net Value of Repossessed inventory
Problem V Page 270

How do we determine the fair value at date

of Repossession?
We follow PAS 2, since it will become part of
our Inventory. For listed prices (there is an
existing published rates/prices), valued at
Estimated Selling Price less costs to sell,
which include reconditioning costs and other
costs related to resale . For unlisted prices,
should be reduced further by Normal Gross
Profit. (Problem VI Page 270)
Trade-Ins Merchandise are recorded at the
NRV. Over or underallowances are increases
and decreases to the Installment Sales
balance. Problem VII 270)