Acca f3 Financial Accounting (int) Study Text

Part F  Preparing basic financial statements

  21:  Preparation of basic financial statements for companies

373

ZABIT CO 

STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20X7 

$'000

$'000

ASSETS

Non-current assets

Property, plant land and equipment

     Property at valuation

800

     Plant:  cost

480

  

depreciation

182

298

Goodwill

 20 

Investments

   231

Current assets

Inventory

220

Trade accounts receivable

179

Prepayments

6

Cash

126

   531

Total assets

1,880

EQUITY AND LIABILITIES 

Equity

50c ordinary shares

400

7% $1 preference shares

100

Share premium

70

Revaluation reserve

392

General reserve

187

Retained earnings

319

1,468

Non-current liabilities

10% loan stock (secured)

200

Current liabilities

Trade accounts receivable

195

Accrued expenses

17

   212

Total equity and liabilities 

1,880

Tutorial note

. A lot of information has been shown on the face of the statement of comprehensive income 

and statement of financial position. However, for external purposes, most of this would be hidden in the 

notes.

6 IAS 18 Revenue 

IAS 18 Revenue is concerned with the recognition of revenues arising from fairly common transactions: 

 

The sale of goods 

 

The rendering of services 

 

The use of others of assets of the entity yielding interest, royalties and dividends. 

Generally revenue is recognised when the entity has transferred to the buyer the 

significant risks and 

rewards of ownership and when the revenue can be measured reliably.

FAST FORWARD

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374

21: Preparation of financial statements for companies   Part F  Preparing basic financial statements 

6.1 Introduction 

Accruals accounting is based on the 

matching of costs with the revenue they generate. It is crucially 

important under this convention that we establish the point at which revenue is recognised, so that the 

correct treatment can be applied to the related costs. For example, the costs of producing an item of 

finished goods should be carried as an asset in the statement of financial position until such time as it is 

sold; they should then be written off as a charge to the trading account. Which of these two treatments 

should be applied cannot be decided until it is clear at what moment the sale of the item takes place.

The decision has a 

direct impact on profit since, under the prudence concept, it is unacceptable to 

recognise the profit on sale until a sale has taken place, in accordance with the criteria of revenue 

recognition.

Revenue is generally recognised as 

earned at the point of sale, because at that point four criteria will 

generally have been met. 

 

The product or service has been 

provided to the buyer.

 

The buyer has 

recognised his liability to pay for the goods or services provided. The converse of 

this is that the seller has recognised that ownership of goods has passed from himself to the 

buyer.

 

The buyer has indicated his 

willingness to hand over cash or other assets in settlement of his 

liability.

 The 

monetary value of the goods or services has been established. 

At earlier points in the business cycle there will not in general be 

firm evidence that the above criteria will be 

met. Until work on a product is complete, there is a risk that some flaw in the manufacturing process will 

necessitate its writing off; even when the product is complete there is no guarantee that it will find a buyer. 

At later points in the business cycle, for example when cash is received for a credit sale, the recognition of 

revenue may occur in a period later than that in which the related costs were charged. Revenue 

recognition then depends on fortuitous circumstances, such as the cash flow of a company's receivables, 

and can fluctuate misleadingly from one period to another. 

However, there are times when revenue is 

recognised at other times than at the completion of a sale.

For example, in the recognition of profit on long-term construction contracts. Under IAS 11 Construction

contracts

 (not in your syllabus) contract revenue and contract costs are recognised by reference to the 

stage of completion of the contract activity at the reporting date. You will learn about this later in your 

studies.

6.2 IAS 18 Revenue 

IAS 18 governs the recognition of revenue in specific (common) types of transaction. Generally, 

recognition occurs when it is probable that 

future economic benefits will flow to the entity and when 

these benefits can be 

measured reliably.

Income, as defined by the IASC's Framework document (see

 Chapter 3

), includes both revenues and 

gains. Revenue is income arising in the ordinary course of an entity's activities, such as sales, fees, 

interest, dividends or royalties. 

6.3 Scope 

IAS 18 covers the revenue from specific types of transaction or events. 

Sale of goods (manufactured products and items purchased for resale) 

Rendering of services

 

Use by others of entity assets yielding 

interest, royalties and dividends

Interest, royalties and dividends are included as income because they arise from the use of an entity 

assets by other parties. 

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