Financial Reporting Standards 18 Revenue (Scope and Objectives)

The main goal of every business is to generate income (Also see 4 Warning Signs to on Your Financial Statements). Based on the Framework for Preparation and Presentation of financial statements, income is the increment in economic benefits within a specific accounting duration. This increment is generally from the increased assets or reduced liabilities that result in increased equity.

Income acquires both revenue and gains. Revenue is the income that is gained from company activities. You can utilise terms, like royalties, interest, sales and dividends to describe revenue. The main purpose of the FRS 18 is to prescribe the correct method in accounting for revenue gained from different occasions and types of transactions (Also see Most Welcomed Business Trends In Malaysia).

Majority of business owners and accountants might not know when to acknowledge company revenue in the financial statement (Also see Critical Areas Business Owners Should Look At). According to FRS 18, revenue is recognised when you are certain that future economic benefits will stream into the business.

Scope:

Every business has to use this standard in accounting for revenue that is gained from the following transactions and occasions:

• Service rendered.
• Sale of goods.
• Dividends, royalties and interest that obtained when other entities utilise the business’s assets.

According to this standard, the items produced by a company with the purpose of selling them are referred to goods. Goods are also the items that bought for reselling.

When other entities utilise your company’s assets, the revenue arises from the following activity:

• Interest – the charges for using cash or cash equivalents of the business.
• Dividends – these are the distributions of business paid to its shareholders. The distributions are proportional to the holdings of a specific class of capital by the shareholder.
• Royalties – the charges for using non-current assets of the business, such as copyrights, trademarks and computer software.

The FRS 18 does not apply to revenue that arises from the following:

• Dividends that arise from financial investments using the equity technique.
• Lease agreements.
• Insurance contracts that contained in the scope of Financial Reporting Standard 4.
• Variations in the worth of other current assets.
• Mineral resources extraction.
• Variations in the fair value of financial assets and financial liabilities.
• Acknowledgement of Agricultural produce.

Through understanding FRS 18, you could make the right decisions when recognising revenue in the financial statement of your company. You may contact any accounting firm in Johor Bahru to learn more about FRS 18.