[Link].

com Example 1: Measurement of revenue IAS 18: Revenue

Voyage ltd. intends to buy 30 trucks from Autocar, local car dealer. However, due to cash shortage, Voyage is not able to pay immediately after
planned delivery, therefore Autocar agrees that Voyage pays a half of total price at delivery and the second half after 1 year. Moreover, Autocar
agrees to provide 5% discount if Voyage buys 30 trucks.
1 month later, Voyage sends an e-mail to Autocar with acceptance of all conditions. 2 weeks after that e-mail, Autocar calls Voyage that 30 trucks are
ready, Voyage takes trucks and pays the 1st half of total price.
Price per 1 truck is 32 000 EUR. Interest rate for 1-year term deposits offered by banks is 1,5% p.a., interest on short-term bank loans is 3,5% p.a.
Company, who provides flexible consumer credits, provides them at 5,5% p.a. Clients of this company may repay their debts anytime according to
their choice, but with final repayment after 2 years.
What is total revenue earned by Autocar in this transaction? When should the revenue be recognized?

1. Calculating nominal consideration received

Purchase price per 1 truck: 32,000 EUR

Purchase price per 30 trucks (30*32 000) 960,000 EUR
Less 5% volume discount (0,05*960 000) -48,000 EUR
Total nominal consideration: 912,000

2. Calculating fair value of consideration

Amount received at delivery (912 000/2) 456,000 A

Amount to be received in 1 year: 456,000
Interest rate for similar instrument: 3.50%
Present value of amount to be received in 1 year (456
440,580
000 / (1+0,035)) B
Fair value of consideration: 896,580 C=A+B

3. Time of revenue recognition

Revenue is recognized at the date of sale, that is at delivery of 30 trucks to Voyage. Accounting treatment is as follows:

Revenue at the date of sale:

Debit Cash received at sale 456,000

Debit Receivable from sale 440,580
Credit Revenue -896,580
0

In a year of last installment (or in time proportion over year after sale):

Debit Receivable from sale 15,420

Credit Interest income (440 580*3,5%) -15,420
0

When Voyage pays 2nd installment:

Debit Cash received 456,000

Credit Receivable from sale (440 580+15 420) -456,000
0

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[Link] Example 2: Measurement of revenue II. IAS 18: Revenue

The same example as previous with the following difference:

No volume discount is provided.
Normal purchase price is 32 000 EUR per truck. However, Autocar agrees to receive one half now and the second half in 1 year only if Voyage
accepts increased purchase price of 33 000 EUR per truck.
What is total revenue earned by Autocar in this transaction?

1. Calculating nominal consideration received

Purchase price per 1 truck: 33,000 EUR

Total nominal consideration (33 000*30) 990,000

2. Calculating internal rate of return:

Cash out (in form of trucks at ORIGINAL selling price) -960,000 A

Cash in 495,000 B
Net cash out in the beginning of transaction -465,000 C=A+B Formula used:
Net cash in at the end of transaction 495,000 =IRR(c18:c19)
Internal rate of return: 6.45%

3. Calculating fair value of consideration received

Amount received at delivery (990 000/2) 495,000 A

Amount to be received in 1 year: 495,000
Internal rate of return: 6.45%
Present value of amount to be received in 1 year (495
465,000
000 / (1+0,0645)) B
Fair value of consideration: 960,000 C=A+B
= normal selling price for cash sales
Revenue at the date of sale:

Debit Cash received at sale 495,000

Debit Receivable from sale 465,000
Credit Revenue -960,000
0

In a year of last installment (or in time proportion over year after sale):

Debit Receivable from sale 30,000

Credit Interest income (465 000*6,45%) -30,000
0

When Voyage pays 2nd installment:

Debit Cash received 495,000

Credit Receivable from sale (465 000+30 000) -495,000
0

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Simlogic
[Link] Example 3: Sale and repurchase agreements IAS 18: Revenue

Cars Corporation (car manufacturer) sold 4 lorries to Housie Corp. for 300 000 EUR in total. Cars has an option to repurchase these lorries from
Housie at any time within next 3 years for 300 000 EUR plus interest for the period from sale to repurchase at the rate of 4% p.a. (charged on original
selling price).
Based on previous experience, Cars expects to repurchase these lorries in 2 years. These lorries will stay in Cars' premises and Cars will bear all costs
of repairs and maintenance.
How would this transaction appear in financial statements of Cars?

1. Is that revenue?

Transaction is rather secured loan than sale (repurchase is expected).

Therefore, Cars keeps to recognize goods in financial statements, no sales revenue is recorded. Instead, financial income from Housie is
recognized as financial liability.

Debit Cash 300,000

Credit Liabilities - loan -300,000
0

2. Calculating financial cost:

Interest charged (300 000*1,04^2-300 000) 24,480

Debit Interest expense 24,480 Note: Cars charges interest over 2 years, not
Credit Liabilities - loan -24,480 all at once. Compound interest method has
0 been used.

Repayment after 2 years:

Debit Liabilities - loan (300 000 + 24 480) 324,480

Credit Cash -324,480
0

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[Link] Example 4: Installation and servicing fees IAS 18: Revenue

ABCcom Corporation is a major telecom operator on the market wishing to transfer its reporting to IFRS. When acquiring new client, they
charge him up-front non-refundable fee amounting to 100 EUR. This fee is charged for installation of telecom line and modem (30 EUR) and for
connection that is uncancellable for 2 years (70 EUR).
When should the revenue be recognized?

Solution

Installation fees 30
Connection fees for the current year (70/2 - or any year proportion) 35
Revenue recognized immediately at installation 65

Deferred revenue (70 - 35)

Debit Cash 100

Credit Revenue (30 +70/2) -65
Credit Liabilities - deferred income -35
0

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 [Link] Example 4: Installation and servicing fees IAS 18: Revenue

c
[Link] Example 5: Fees for financial services IAS 18: Revenue

Cars Corporation wants to develop new model of lorry. Due to current cash shortage, Cars decided to take a loan from the local financing institution. This
financing institution performed careful evaluation of Cars' financial position and offered to Cars the loan with the following conditions:
1. Amount of loan (principal) = 1 000 000 EUR
2. Start date: 1-April-20X1
3. End date: 31-March-20X6
4. Interest rate: 4% p.a.
5. Initial fee for processing of Cars' request and preparing documentation: 7 000 EUR
6. Repayment schedule: 5 annual installments of 224 627,20 EUR, starting 31-March-20X2.
How would financing institution recognize revenue from initial fee?

1. Revenue recognition

Initial fee is an integral part of generating an involvement with the resulting financial instrument (loan) and therefore, it must be deferred and
recognized as an adjustment to the effective interest rate.

2. Calculating effective interest rate and revenues recognized

Repayment schedule for Cars Corporation:

Ending balance of
Year Dates Cash flow Interest Principal
principal
0 1.4.20X1 -1,000,000.00 1,000,000.00
1 31.3.20X2 224,627.20 40,000.00 184,627.20 815,372.80
2 31.3.20X3 224,627.20 32,614.91 192,012.29 623,360.51
3 31.3.20X4 224,627.20 24,934.42 199,692.78 423,667.73
4 31.3.20X5 224,627.20 16,946.71 207,680.49 215,987.24
5 31.3.20X6 224,627.20 8,639.49 215,987.71 -0.47 rounding
4.00%

Note: Agreed interest rate of 4% equals to internal rate of return (IRR) of

drafted repayment schedule - for keeping it simple.

Adjusted repayment schedule by initial fee (= adjustment to effective interest rate)

Ending balance of
Year Dates Cash flow Interest Principal
principal
0 1.4.20X1 -993,000.00 993,000.00
1 31.3.20X2 224,627.20 42,208.21 182,418.99 810,581.01
2 31.3.20X3 224,627.20 34,454.35 190,172.85 620,408.16
3 31.3.20X4 224,627.20 26,370.91 198,256.29 422,151.87
4 31.3.20X5 224,627.20 17,943.88 206,683.32 215,468.55
5 31.3.20X6 224,627.20 9,158.65 215,468.55 0.00
4.25%

Adjusted effective interest rate,

Formula used: =IRR(D42:D47)
[Link] Example 6: Franchise IAS 18: Revenue

Cars Corporation owns the rights to car dealing franchise. On 1 January 20X1, Cars sold right to open new store to Dealers ltd. The franchise is
for 4 years.
Cars received initial fee of 75 000 EUR for the first year and will receive 10 000 EUR per annum thereafter. On the other hand, Cars is obliged to
provide further advertising and servicing assistance to Dealers . Cars estimate total costs of 12 000 EUR for this assistance, while normal profit
margin on such assistance is about 15% p.a. (calculated as mark-up on costs).
When will Cars recognize revenue and in what amount?

1. Calculation of deferred part of initial fee

Estimated costs of assistance in 2nd-5th year (12 000*4) 48,000 EUR

Estimated revenues at profit margin of 15% (48 000*1,15) 55,200 A

Planned receipts per contract (10 000*4) 40,000 B

Difference: 15,200 C=A-B

Difference between estimated revenues and planned receipts is in fact included in initial fee of 75 000 EUR. Therefore, 15 200 EUR from
initial fee needs to be deferred.

2. Recognizing revenue in the 1st year

Debit Cash 75,000

Credit Revenue (75 000 - 15 200) -59,800
Credit Liabilities - deferred income -15,200
0

3. Recognizing revenue in the 2nd-5th year

p.a. Total
Debit Cash 10,000 40,000
Debit Liabilities - deferred income (15 200/4) 3,800 15,200
Credit Revenue (12 000*1,15) -13,800 -55,200
0 0
[Link] Example 7: Fees for software development IAS 18: Revenue

ManyBits ltd. is a software development company who signed contract with a client for development of customized IT security software on 30
June 20X1. Software comprises of 4 modules and total value of the contract is 1 000 000 EUR. Payment schedule is as follows:
1. 100 000 EUR - 7 days after signature of the contract (7 July 20X1) - non-refundable
2. 400 000 EUR - On implementation of modules A and B (31 March 20X2)
3. 400 000 EUR - On implementation of modules C and D (10 October 20X2)
4. 100 000 EUR - 6 months after full implementation (after debugging and any change requests).

ManyBits' project manager made an estimate of time that software developers would spend on its development:
Planning phase - 800 hours
Modul A - 1 000 hours
Modul B - 1 500 hours
Implementation of modul A and B - 200 hours
Modul C - 2 400 hours
Modul D - 2 000 hours
Implementation of modul C and D - 300 hours
Debugging and change requests - 400 hours (after complete delivery)
TOTAL TIME ESTIMATION - 25 000 hours
On 31 December 20X1, project manager has reviewed timesheets of software developers related to this project and made the following
summary:

A B A/(A+B)
Estimate of
% of
Phase Planned Actual hours-to-
completeness
complete
Planning phase 800 780 0 100.00%
Modul A 6,000 6,234 0 100.00%
Modul B 5,000 230 4,800 4.57%
Implementation of modul A and B 400 0 400 0.00%
Modul C 6,500 0 6,500 0.00%
Modul D 4,700 0 4,700 0.00%
Implementation of modul C and D 600 0 600 0.00%
Debugging and change requests 1,000 0 1,000 0.00%
TOTAL 25,000 7,244 18,000 28.70%

Note: Project manager calculated stage of completeness based on actual figures (not planned). How would ManyBits recognize revenue from this
contract? Assume that hourly costs for all programmers in team are the same.

1. Calculation of stage of completeness

Stage of completeness might be calculated by more methods. Here, stage of completeness is measured by survey of work performed on the
project where initial plan was adjusted to actual figures - this is acceptable.
When there are programmers at various levels (and various costs), it would be more appropriate to calculate stage of completion as cost
incurred to date / total estimated costs.

2. Recognizing revenue in 20X1

Total contract revenue: 1,000,000 EUR

Percentage of completion: 28.70%
Revenue recognized in 20X1: 286,959 EUR

1st payment accepted from client:

Debit Cash 100,000

Credit Liabilities - deferred income -100,000
0

Revenue in 20X1 - at 31-December-20X1:

Debit Liabilities - deferred income 100,000

Debit Assets - unbilled revenues 186,959
Credit Revenues from SW development -286,959
0
[Link] Example 8: Dividends IAS 18: Revenue

Cars Corporation owns 15% share in Vehicles Corporation. On 15 December 20X1, Vehicles' Board of Directors proposed payment of dividends
to shareholders in total amount of 2 000 000 EUR. General assembly of Vehicles shareholders took place on 14 January 20X2 and proposed
dividends were approved.
Vehicles paid 50% of total dividend on 27 February 20X2. Remaining dividends have not been paid as of 31 December 20X2.
How would Cars Corporation account for these transactions?
Note: Cars Corporation accounts for its investment in Vehicles Corporation at cost, not applying equity method.

1. On 15 December 20X1

Cars Corp. doesn't recognize dividend revenue, as proposal of dividends by Board of Directors does not establish shareholder's right to receive
them.

2. On 14 January 20X2

Cars Corp. recognizes dividend revenue, as approval of dividends by G.A. establishes right to receive dividends. Revenue is accounted at full
right regardless payment.

Debit Receivable from dividends (2 000 000 * 15%) 300,000

Credit Dividend revenue -300,000
0

3. On 27 February 20X2

Debit Cash (300 000/2) 150,000

Credit Receivable from dividends -150,000
0

4. On 31 December 20X2

As the second half of dividends has not been paid yet, Cars Corp. shows receivable from dividends towards Vehicles amounting to
150 000 EUR as of 31 December 20X2.

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