Revenue and Revenue Recognition

Revenue represents the gross income (economic benefits) earned by a company from its principal business activities. It includes income from sales of goods and services, royalty income and dividends from its investments.

Revenue is different from gains in that gains represent increase in value not related to the company's principal business activities. For example, if a company is engaged in manufacturing and sales of PCs, any income from sale of PCs or sale of after-sale service contracts is revenue and so is any royalty received on any patented technology. However, if the same company sells some of its property, plant and equipment for more than its book value there is an increase in value but that is a gain and not revenue because it is not related to the company's principal business activity.

IAS 18 Revenue contains IFRS principles for revenue recognition while ASC 605 Revenue recognition is the US GAAP equivalent of IAS 18. Both standards are quite similar in their approach to revenue recognition but the US GAAP provides more specificity.

Since revenue recognition involves considerable judgment by management of a company, the accounting standards adopt a substance-over-form perspective. Revenue is recognized when risk and rewards inherent in the goods (or services) is transferred to the other entity, the consideration for the transfer is measurable and is realized (or realizable).

Written by Obaidullah Jan, ACA, CFAhire me at