Revenue Recognition

Recognition of Interest, Royalties and Dividends

(a) Interest is recognised on a time proportion basis that takes into account the effective yield on the asset. (b) Royalties are recognised on an accruals basis in accordance with the substance of the relevant agreement. (c) Dividends are recognised when the shareholder's right to receive payment is established.

Measurement of Revenue

(a) Revenue should be measured at fair value of the consideration received or receivable. (b) Fair value (公允價值) is the amount for which an asset would be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction. (指在公平交易中，熟悉情況的當事人自願據以進行資產交換或債務清償的金額。)

Methods of Measuring the Revenue of Rendering of Services

- Percentage of completion method - Straight line basis - Straight line basis

Based on the entity concept, revenue includes only the gross inflows of economic benefits received and receivable by the enterprise on its own account.

Amounts collected on behalf of third parties such as sales taxes are not counted. Similarly, in an agency relationship, any amounts collected by an enterprise on behalf of the principal are also not accounted for. Revenue is reduced by trade discounts and volume rebates but not reduced by subsequent bad debts and sales returns.

Transactions: On approval when the buyer has negotiated a limited right of return.

Critical Event If there is uncertainty about the possibility of return, revenue is recognized when the shipment has been formally accepted by the buyer or the goods have been delivered and the time period for rejection has elapsed.

Transactions: Installation and inspection.

Critical Event Revenue is normally recognized when the buyer accepts delivery, and installation and inspection are complete.

Transactions: Consignment sales under which the recipient (buyer) undertakes to sell the goods on behalf of the shipper (seller).

Critical Event Revenue is recognized by the shipper when the goods are sold by the recipient to a third party.

Transactions: Cash on delivery sales.

Critical Event Revenue is recognized when delivery is made and cash is received by the seller or its agent

Transactions: "Bill and hold" sales - Delivery is delayed, but the buyer takes title and accepts billing.

Critical Event: Revenue is recognized when the buyer takes title. Revenue is not recognized when there is simply an intention to acquire or manufacture the goods in time for delivery.

Transactions: Sales and repurchase agreements

Critical Event: In substance, the seller has transferred the risks and rewards of ownership to the buyer and hence revenue is recognized.

Transactions: Installment sales, under which the consideration is receivable in installments.

Critical Event: Revenue attributable to the sales price, exclusive of interest, is recognized at the date of sale.

Transactions: Property of sales.

Critical Event: Revenue is normally recognized when legal title passes to the buyer. If the seller is obliged to perform any significant acts after the transfer of the equitable and/or legal title, revenue is recognized as the acts are performed.

Transactions: Orders when payment is received in advance of delivery for goods not presently held in stocks.

Critical Event: Revenue is recognized when the goods are delivered.

Transactions: Subscriptions to publications and similar items.

Critical Event: Revenue is recognized when the items involved are despacted.

Transactions: Sales to intermediate parties, e.g. distributors, dealers, etc. for resale.

Critical Event: Revenue is recognized when the risks and rewards of ownership have passed.

Transactions: Initiation, entrance and membership fees

Critical Event: If fees permit only membership, the fee is membership fees. Recognised as revenue when no significant uncertainty as to their collectibility exists. If fees include other services or facilities provided, revenue is recognized on a basis reflecting the timing, nature and value of the benefits provided.

Transactions: Advertising commissions

Critical Event: Media commissions are recognized when the related advertisement or commercial appears before the public.

Transactions: Financial services fees

Critical Event: Recognition of revenue for financial service fees depends on the purposes for which the fees are assessed and the basis of accounting for any associated financial instrument.

Transactions: Admission fees

Critical Event: Revenue from artistic performance, other special events is recognized when the event takes place.

Transactions: Installation fees

Critical Event: Revenue is recognized by reference to the stage of completion of the installation.

Transactions: Fees from the development of customized software

Critical Event: Revenue is recognized by reference to the stage of completion.

Transactions: Franchise fees

Critical Event: Revenue is recognized on a basis that reflects the purpose for which the fees are charged.

Transactions: Insurance agency commissions

Critical Event: Revenue is recognized on the renewal date of the policy provided that the agent will not be required to perform further services.

Transactions: Tuition fees

Critical Event: Revenue is recognized over the period of instruction.

Transactions: Servicing fees included in the price of the product

Critical Event: The identifiable amount included in the selling price, i.e. service fees, is deferred and recognized over the period during which the service is performed.

Dividends

Dividends are distributions of profit to holders of equity investments, in proportion with their holdings, of each relevant class of capital.

Gains

Gains represent other items that meet the definition of income. Gains represent increases in economic benefits and as such are no different in nature from revenue. However, they are often reported net of related expenses, e.g. net exchange gains, gain on disposal of non-current assets. They also include unrealized gains, for example, arising from the revaluation of investment in securities.

Income

Income is increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants.

Interest

Interest is the charge for the use of cash or cash equivalents or amounts due to the entity.

Recognition of Sale of Goods

Revenue from the sale of goods should be recognized when all the following conditions have been satisfied: (i) the enterprise has transferred to the buyer the significant risks and rewards of ownership of the goods; (ii) the enterprise retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold; (iii) the amount of revenue can be measured reliably; (iv) it is probably that the economic benefits associated with the transaction will flow to the enterprise; and (v) the costs incurred or to be incurred in respect of the transaction can be measured reliably.

Revenue

Revenue is defined as the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an enterprise when those inflows result in increases in equity, other than increases relating to contributions from equity participants.

Transactions: Lay away sales under which the goods are delivered only when the buyer makes the final payment in a series of instalments.

Revenue is recognized when the goods are delivered

Royalties

Royalties are charges for the use of non-current assets of the entity, e.g. patents, computer software and trademarks.

Exchange of assets

The revised HKAS 16 specifies that exchange of items of property, plant and equipment, regardless of whether the assets are similar, are measured at fair value of the goods or services received, adjusted by the amount of any cash or cash equivalents transferred.

Completed performance method

When a specific act is much more significant than any other acts, the recognition of revenue is postponed until the significant act is executed. For example, a moving company may pack, load, store and deliver goods to destinations designated by customers. The act of delivery, the last of a series of acts, is so significant that revenue can only be recognized when delivery is completed.

Straight line basis

When services are performed by an indeterminate number of acts over a specified period of time, revenue is recognized on a straight line basis over the specified period unless some other better method is available. For example, a fitness club which provides unlimited use of its facilities to its members offers a three-year membership subscription at a discount. For such membership fees, revenue should be recognized over the three year period on a straight-line basis.

Deferred payment of revenue

When the inflow of cash or cash equivalents is deferred, the fair value of the consideration will be less than the nominal amount of cash received or receivable. This happens when an enterprise provides interest free credit to the buyer or accepts a note receivable which is below the market interest rate. Such an arrangement in fact constitutes a financing transaction. The fair value of the consideration has to be determined by discounting all future receipts at an imputed interest rate. The difference between the fair value and the nominal amount of the consideration is recognized as interest revenue.

Recognition of Rendering of Services

When the outcome of a transaction involving the rendering of services can be measured reliably, revenue associated with the transaction should be recognized by reference to the stage of completion of the transaction at the statement of financial position. The outcome of a transaction can be estimated reliably when all the following conditions are satisfied: (i) the amount of revenue can be measure reliably; (ii) it is probable that the economic benefits associated with the transaction will flow to the enterprise; (iii) the stage of completion of the transaction at the statement of financial position date can be measured reliably; and (iv) the costs incurred for the transaction and the costs to complete the transaction can be measured reliably.

services cannot be estimated reliably,

When the outcome of the transaction involving the rendering of services cannot be estimated reliably, revenue should be recognized only to the extent of the expenses recognized that are recoverable.

- Percentage of completion method

With service industries, revenue is recognized by reference to the stage of completion of a transaction which is often referred to as the percentage of completion method. The stage of completion of a transaction can be determined by various means depending on the nature of the transaction. These include: (i) surveys of work performed; (ii) services performed to date as a percentage of total services to be performed; (iii) the proportion that costs incurred to date bear to the estimated total costs of the transaction.

Disclosure Requirements

a) the accounting policies adopted for the recognition of revenue including the methods adopted to determine the stage of completion of transactions involving the rendering of services; (b) the amount of each significant category of revenue recognized during the period including revenue arising from: (i) the sales of goods; (ii) the rendering of services; (iii) interest; (iv) royalties; (v) dividends; and (c) the amount of revenue arising from exchanges of goods or services in each significant category of revenue.