Register now or log in to join your professional community.
In normal trading, manufacturing and service concerns, revenue is recognized when the goods are delivered or services are rendered.
For long term contracts, such as construction projects, a Percentage of Completion (PoC) approach is used. Under this approach, the matching principle of accounting is prevalent, where no revenue is recognized independently from its associated costs.
An example of a construction contract would be most useful here, so let us consider these inputs.
Contract Duration is2 Years
Total Contract Revenue =2,000,000
Total Estimated Costs for Full Contract =1,000,000
Total Invoiced Amount at end of Year1 =1,200,000
Total Expenses Incurred at end of Year1 =500,000
Percentage of Completion = Total Expenses Incurred / Total Estimated Costs for Full Contract
=500,000 /1,000,000
=50%
Total Revenue to be Recognized at End of Year1 = Total Contract Revenue * PoC
=2,000,000 *50%
=1,000,000
Revenue in Income Statement =1,000,000
The difference (1,200,000 Invoiced -1,000,000 Recognized) is Capitalized to the Balance Sheet as a Liability or Unearned Revenue if the invoiced amount exceeds the recognized amount, or on the Asset side of the Balance Sheet as an Accrued Revenue if the invoiced amount is less than the recognized Amount.
I will just answer the second part of your query. '' What are the revenue recognition principles"
Revenue is the gross inflow of economic benefits (cash, receivables, other assets) arising from the ordinary operating activities of an entity (such as sales of goods, sales of services, interest, royalties, and dividends).
Recognition of revenue is when 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.
IAS18 provides guidance for recognising the following specific categories of revenue:
Sale of goods
Rendering of services
Interest, royalties, and dividends
You will be considering if its IAS11 on construction contracts. There is a new standard coming up on this IFRS15.
Check the website iasplus.com for information on accounting standards.
revenue will recognized when is substantial revenues earned
there are tow principle to revenues recognized 1 - substantial performance of service
2- reasonable estimated of income
