WEEKLY TASK

ACCOUNTING THEORY
(SUBJECT CODE: ECAU601401)

REVENUE

Lecturer:
Mrs. Siti Nuryanah, S.E., M.S.M., M.Bus.Acc., Ph.D.

Group Member
1. Eggie Auliya Husna 1706105246
2. Fendhi Birowo 1706105290
3. Yolanda Tamara 1406612275

SALEMBA EXTENSION CLASS

ACCOUNTING PROGRAM
FACULTY OF ECONOMICS AND BUSINESS
UNIVERSITY OF INDONESIA
YEAR 2018
MINDMAP FOR CHAPTER 9

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 CHAPTER 9
REVENUE

A. REVENUE DEFINED
 Paton and Littleton call revenue the ‘product of the enterprise’ capturing the physical
flow of producing the firm’s output. They also add that revenue is ‘represented
finally by the flow of funds from the customers’ thus capturing the monetary flow.
Thus, we conclude that revenue is directly related to the monetary event of value
increasing in the firm, which arises out of production or sale of output.
 Revenue is defined in IAS 18/AASB 118 Revenue, paragraph 7, as having a flow
characteristic:
Revenue is the gross inflow of economic benefits during the period arising in the
course of the ordinary activities of an entity when those inflows result in increases in
equity, other than increases relating to contributions from equity participants.
 In the United States, the FASB defines revenues as follows:
Revenues are inflows or other enhancements of assets of an entity or settlements of
its liabilities (or a combination of both) during a period from delivering or producing
goods, rendering services, or other activities that constitute the entity’s ongoing
major or central operations.
 The IASB definition is consistent with the FASB’s definition of revenue and focuses
on inflows or other asset enhancements arising from an entity’s ongoing major or
central operations. Gains are included as part of income since they represent future
economic benefits and are thus no different in nature from revenue. Therefore, they
are not considered a separate element in the Framework (para.75). the definition of
income also includes unrealised gains, which has implications for revenue
recognition rules.
 In contrast to the IASB approach, the FASB makes a distinction between revenues
and gains, although both are included in profit. Gains are increases in net assets from
‘peripheral or incidental transactions’ and from other events that may be largely
beyond the control of the firm. Revenues pertain to the ongoing major or central
operations.
 However, Martin suggested that there appears to be no reason that revenues and
gains should not follow the same rules for their recognition and measurement.
Fundamentally, both represent increases in net assets and they should therefore be
treated identically.
Behavioural View of Revenue
 Revenue indicates the ‘accomplishment’ of the firm. It is a measure of the entity’s
‘gross performance’ as a profit-making business. When expenses are seen as
representing the ‘effort’ of the firm then the matching of revenues and expenses
result in profit: the ‘net accomplishment’ of the firm. (Paton and Littleton)

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  Bedford stresses an operational view of revenue and profit, where profit is defined in
terms of certain operations performed by the entity rather than being merely the
result of the application of accounting methods. Profit arises only from those
activities that are designated business operations. General business operations
specified by Bedford are:
- Acquisition of money resources
- Acquisition of services
- Use of services
- Recombination of acquired services
- Disposition of services
- Distribution of money resources
 Myers relates the concept of revenue and profit to certain critical events and
decisions made by the managers of the firm. He suggests that profit is earned at the
moment of making the most critical decision or of performing the most difficult task
in the cycle of a complete transactions. However, he stresses that the critical event
will be at a different point depending on the nature of the business.
 In contrast to Myers, Paton and Littleton argue that revenue and profit accrue
throughout the earning process – that is, there is a continual change in value of the
total assets and capital as the firm undertakes the activities specified in the process.

B. REVENUE RECOGNITION
Historical Perspective
– Profit (and revenue) determined on the basis of the increase in the net worth of the
firm
– Supplanted by the notion that profit and revenue had to be realised
– Developed into the revenue recognition principle (or realisation principle)
– A distinction between capital and profit emerged from court rulings
Criteria for Revenue Recognition
The key question is: at what point during the earning process can revenue be recorded as
earned because there is sufficient evidence?
Recognition criteria are based on the desire for both relevant and reliable accounting
information
– measurability of asset value
– existence of a transaction
– substantial completion of the earning process

C. REVENUE MEASUREMENT
According to IAS 18/AASB 118, revenue is to be measured at the fair value of the
consideration received or receivable (para.9).
Sale of Goods

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 The sales point in the earning process is selected as being generally the most appropriate
time to measure and record revenue because it meets the criteria for recognition.
According to IAS 18/AASB 118, an entity should record sales revenue if significant risks
of ownership are retained, then the transaction is not a sale and revenue is not recognised
(para.16).
Exceptions to using the sale point are:
– revenue recognised during production
e.g. construction contracts with percentage-of-completion method
– revenue recognised at the end of production
production is the critical event and the sale is assured
– revenue recognised when cash is received after the sale is made
 under the instalment method, the cost of the product is allocated by the ratio cash
collected during the period divided by total sales price (total cash expected)
 under the cost recovery method, an amount of expense equal to revenue is
recognised until all the costs are recovered. Thereafter, any additional cash received
is profit.
Rendering of Services
IAS 18/AASB 118 para.20 requires that revenue associated with rendering of services is
to be recognised by reference to the stage of completion of the transaction at reporting
date. Thus, revenue is recognised in the period in which the service is rendered. Para.23
states that an entity is generally able to make reliable estimates, enabling recognition of
revenue, when it has agreed to the following with other parties:
- Each party’s enforceable rights regarding the service to be provided and received by
the parties,
- The consideration to be exchanged, and
- The manner and terms of settlement.
Revenue recognitionmust consider the nature and timing of the acts. If there is a
significant act which must be completed, recognition should not occur until this act has
been performed. Where the services consist of an indeterminate number of acts over a
specific period, revenue should be recognisedon a straight-line basis (para.25). the
amount of revenue recognised should reflect the service provided.
Interest, Royalties, and Dividends
Interest, royalties, and dividends can be recognised when received, satisfying all three of
the general recognition criteria (measurability, transaction and substantial completion).
However, for some items, the passing of time signifies revenue has been earned. In this
case, accrued revenue is recorded, even though there is not external transaction. An
example is interest revenue at the end of accounting period.
According to IAS 18;/AASB 118 para.30:
- Interest should be accrued using the effective interest method
- Royalties should in accordance with the substance of the relevant agreement
- Dividends are to be recognised when the shareholder has the right to receive payment

D. CHALLENGES FOR STANDARD SETTERS

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Developments in Revenue Recognition and Measurement
The FASB and IASB have undertaken a joint project in relation to revenue recognition
and measurement because revenue transactions are not well served by existing guidance
literature. This project aims to develop a comprehensive set of principles for revenue
recognition that will eliminate the inconsistencies in the existing authoritative literature
and accepted practices.
The FASB and IASB proposed:
– recognising revenues when they arise
– measuring them at fair value at that point
– measuring them when they arise from an increase in assets or a decrease in liabilities,
at the fair value of that change
However, they encompass a change in emphasis in some areas, which may lead to
changes in accounting practice, for example:
– revenue is recognised when it arises (changes emphasis from realisation to
timeliness)
– revenue can result from the changes in asset and liability values and from holding
assets (that is, from remeasurements)
– revenue recognition and measurement reflect fair value
– measurement should be reliable
Further, the IASB has tentatively agreed that two criteria must be met to recognise
revenue. These are:
– the elements criterion  a change in assets or liabilities must have occurred
– the measurement criterion (no probability criterion)  the change in assets or
liabilities can be appropriately (reliably) measured
Fair Value Measurement
Under a mixed measurement attribute model, all items are measured at fair value at
acquisition (i.e. an acquisition cost of entry price) and thereafter carried at historical cost
or written down historical cost. Some items are remeasured to fair value subsequent to
acquisition. Several IASB standards require that gains and losses arising from
remeasurement of assets are included in either in operating income or in ‘comprehensive
income’ (i.e. income which includes all gains and losses from the period, whether it
realised or unrealised). Greater use of fair value measurement is standards means that
gains and losses are recognised in the period in which they occur, irrespective of whether
they are realised or not.
Financial Statement Presentation
The IASB has a joint project with the FASB in relation to financial statements
presentation. The project is relevant to a discussion of revenue recognition as it is
concerned with how items of revenue will be reported in the financial statements. In the
course of its deliberations about financial statement presentation the Board has reached
the following tentative conclusions:

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 - An all-inclusive, single income statement
- Realisation is not the basis for inclusion of items
- Separate disclosure of performance and remeasurement

E. ISSUES FOR AUDITORS

Revenue overstatement is likely to be driven by managers’ attempts to deceive financial
statement users. It may occur when managers’ compensation is based on bonuses tied to
targeted revenues. Managers with a history of achieving aggresive or unrealistic profit
forecasts may be managing earnings. The Public Company Accounting Oversight Board
or PCAOB (in the USA) has documented failures by auditors to detect misreported
revenue. Auditors need to be sensitive to the risks surrounding clients that are likely to be
evaluated on revenue growth and should gather direct evidence to support their opinion
that revenue is not misstated. Some revenue misstatement could be attributed to over-
optimism, for example with estimates of the progress of construction contracts. However,
other revenue misstatements are due to fraud (e.g. shipping goods prematurely to buyers
without a firm order, or backdating sales made in the early part of the new accounting
period).

F. PSAK 72
Currently there are several accounting standards for revenue recognition, those
are PSAK 23: Revenue, PSAK 34: Construction Contracts, ISAK 10: Customer Loyalty
Programmers, ISAK 21: Agreements for the Construction of Real Estate, ISAK 27:
Transfer of Assets from Customers, and PSAK 44: Accounting for Real Estate
Development Activities. Those standards are used by entities in various industries to treat
their revenues in accounting records. Unfortunately, there are inconsistencies and
weaknesses in the current standards. For example, PSAK 23 defines the criteria for
revenue recognition is a principle-based standard. While PSAK 44 set rules for revenues
recognition that is a rule-based standard. In addition, current standards have a limited
guidance on important topics such as revenue recognition for multiple element
arrangements. This is one of the reasons for the Indonesian accounting standard setters to
issue ED PSAK 72: Revenue from contracts with customers.
PSAK 72 specifies the accounting treatment for all revenue arising from contracts
with customers. It replaces all existing PSAK dealt with revenue recognition which has
been mentioned above. The core principle in ED PSAK 72 is that an entity will recognize
revenue at an amount reflects the consideration to which the entity expects to be entitled
in exchange for transferring goods or services to a customer.
This standard applies only for contract that have commercial substance, which is
expected to change as a result of the contract (I-e-risk, timing, cash flow). According to
ED PSAK 72, there are five basic steps that an entity needs to follow.

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 Picture 1. The 5-Step Model

These five steps will likely affect entity’s financial statements, business process
and internal controls over financial reporting. For instance, the entity’s business process
must accommodate the need of identifying performance obligation arising from promises,
even it is only implied. Similarly, internal control also must able to prevent from
misidentify such performance obligation. However the impact will vary. Some entity
may be able to implement with limited effort. Others may need significant efforts.

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REFERENCES:
Godfrey, Jayne, et al. 2010. Accounting Theory. 7th edition. John Wiley & Sons Australia Ltd.

PWC Indonesia. (2017). 10 Minutes on PSAK 72. Retrieved from the website
https://www.pwc.com/id/en/publications/assurance/psak-72-10-minutes.pdf

PWC Indonesia. (2017). PSAK 72 Placemat. Retrieved from the website

https://www.pwc.com/id/en/publications/assurance/psak-72--placemat.pdf

RSM Indonesia. (2017). Revenue from Contracts with Customers. Retrieved from the website
https://www.rsm.global/indonesia/en/insights/articles/revenue-contracts-customers