05 Bbfa2203 T1

c  Revenue
Recognition
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Define revenue;
2. Describe the measurement of revenue;
3. Recognise revenue from sales of goods and from rendering of
services;
4. Elaborate on disclosure requirements; and
5. Discuss the accounting policies for the recognition of revenue.
 INTRODUCTION
Why do people run businesses? Your answer might somehow lead us to
conclude that people in general want a more luxurious and prosperous life, or in
other words, more money or revenue in their bank accounts.
Revenue refers to one of the sources of income of an organisation. Revenue

measurement and timing of revenue recognition are crucial in determining the
performance of an enterprise.
Hence, in this topic, we will discuss the general principles for revenue
measurement and recognition. These are the two main factors that account for
revenue. We have to resolve the issue of revenue recognition before deducting
expenditure from revenue in order to determine income. Thus, revenue
recognition is important to the issue of income determination.
Copyright © Open University Malaysia (OUM)

2  TOPIC 1 REVENUE RECOGNITION
1.1 REVENUE (APPLICATION OF MFRS 118)
You need to remember that sales, revenue and income have special meanings in
accounting. The term „sales‰ refers to goods sold by an enterprise which had
bought them for the sole purpose of resale. Therefore, the word „sales‰ should
not be used for the disposal of items such as machinery or motor vehicles that
were purchased for a different purpose.
What is revenue? Generally, it is the sales value of goods and services supplied to
customers. As we compare sales and revenue, we will find that sales are a subset
or part of revenue.
MFRS 118 is the accounting standard covering issues on „Revenue‰. MFRS 118 is
applicable for entities other than Private Entities in entities. MFRS is effective
from January 2012.
It is important to note that a private entity is a private company incorporated

under the Companies Act 1965 and that it is not:
(a) Required to prepare or lodge any financial statements under any law
administered by the Securities Commission or Bank Negara Malaysia; and
(b) A subsidiary or associate of, or jointly controlled by, an entity which is

required to prepare or lodge any financial statements under any law
administered by the Securities Commission or Bank Negara Malaysia.
MFRS 118 defines revenues 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 increase
in equity, other than increases relating to contributions from equity
participants‰.
If you look at the definition, enterprises have different elements in their revenue,
owing to differences in the nature of their ordinary activities. We are referring to
„ordinary activities‰ as principal activities.
For example, the revenue of a hotel may come from renting rooms and providing
food and beverage to its customers.

TOPIC 1 REVENUE RECOGNITION 
3
Now, let us consider a situation where a hotel receives compensation for

damages from the government due to some natural disaster, such as a tsunami.
Should we consider this as part of revenue? The answer is no.
This is because the income is not related to the hotelÊs ordinary activities and is
therefore not part of its revenue. Revenue is the income derived in the ordinary
course of business activity.
From this definition, we know that not all contributions to equity increase can be
classified as revenue. MFRS 118 clearly states that revenue includes only gross
inflows of economic benefit received and receivable by an enterprise on its own
account. Therefore, these inflows of economic benefits do not include increases
related to contributions from shareholders and amounts collected on behalf of
third parties.
For example, equity increases can arise from the issuing of new shares and the
injection of additional funds by the business owner, while sales taxes and goods
and services taxes do not increase equity.
So, what is the difference between revenue and income? The framework for the
preparation and presentation of financial statements defines income as follows:
„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‰.
SELF-CHECK 1.1
Can you differentiate among sale, income and revenue? Explain.
From the given definition, income includes both revenue and gains. Gains differ
from revenue as they do not generally arise from the ordinary course of business
activity. Gains, however, do increase equity. Examples of gains are surplus from
revaluation and disposal of non-current assets.

ACTIVITY 1.1
1. In the case of a trading company, what are its ordinary activities?

Discuss with your classmates.
2. Visit the Malaysian Accounting Standards Board (MASB)
official website (Malaysian Accounting Standards Board.
www.masb.org.my.) to find out its history and what it deals with.
1.2 MEASUREMENT OF REVENUE
Before we can record a transaction, we must know the amount we need to record.
So our concern here is how to measure revenue. According to MFRS 118 [para 9],
we should measure revenue received or receivable at fair value. By the way, do
you know what fair value is?
Fair value is the amount for which an asset could be exchanged, or a liability
settled, between knowledgeable, willing parties, in an armÊs length transaction.
Therefore, the amount of revenue is the agreed price between the enterprise and
the buyer. It is measured at the fair value after deducting trade discounts and
volume rebates allowed by the enterprise. Generally, the market price or value is
taken as the fair value.
Example 1
Wong Sing Sdn. Bhd. is a furniture shop in Selayang. On 1 January 2014, the
company sold 5,000 units of tables to EXEC Sdn. Bhd. at RM100 per unit. The
company gives a 10% trade discount.
Required
How much is the revenue recognised by Wong Sing Sdn. Bhd.?
Solution
Revenue is measured at the fair value after deducting the trade discount.
Revenue = 5,000 units  RM100  90%

= RM450,000

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ACTIVITY 1.2
Find out the difference between cash discount and trade discount.
1.3 REVENUE RECOGNITION
After determining the amount to be recorded, we now need to determine the

timing to recognise the revenue in the income statement. Before we discuss the
recognition criteria, please be reminded that the operating cycle of the entity
consists of many different points. Figure 1.1 shows the typical operating cycle of a
trading company.
Figure 1.1: Operating cycle of a trading company
At the end of the financial year, the activities of a trading company will be at
various points in the operating cycle. Some activities will be at the point of
placing orders while others may be awaiting delivery or billing.
It is necessary to determine a point in the operating cycle at which to recognise

revenues. When an activity reaches this point, the revenue from the activity is
recognised. Therefore, it is important for us to know the criteria of revenue
recognition.

According to MFRS, revenue is recognised when it is probable that future

economic benefit will flow to the enterprise and such benefit can be measured
reliably.
In short, we can recognise revenue when the revenue is measurable and it is

probable that the revenue will be collected in the future. In a situation where
revenue can be measured reliably but the collection is still uncertain, we have to
defer the recognition of revenue until we resolve the uncertainty. In practice, if
we have uncertainty in revenue collection, we either restrict the transaction to be
made in cash or forgo the transaction entirely as it is very likely that we will not
be able to collect the revenue.
Probable means „more likely than not to occur‰, and a probability of more
than 50% would be regarded as more likely than not. In short, probable means
more than 50%.
For example, let us look at the following situation. If at the time of sale or rendering
of service, the enterprise estimates that there is more than a 50% chance that
the sale or service revenue will be collected, it should recognise the revenue at the
point of sale or service rendered. However, if it considers that the probability of
revenue collection is less than 50%, revenue recognition should be postponed
because the pre-requisite condition of probable inflow of economic benefits is not
met.

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1.3.1 Recognition of Sales of Goods

MFRS 118 [para 14] prescribes that revenue from the sale of goods should be
recognised when all the following conditions have been met.
Table 1.1: Conditions that Permit the Recognition of Sales of Goods
Condition Description
Risks and rewards of The enterprise has transferred to the buyer the significant
ownership risks and rewards of ownership of the goods.
Managerial involvement The enterprise retains neither continuing managerial
involvement to the degree usually associated with
ownership nor effective control over the goods sold.
Amount of revenue The amount of revenue can be measured reliably.
Economic benefits It is probable that the economic benefits associated with the
transaction that will flow to the enterprise.
Costs incurred The costs incurred or to be incurred in respect of the
transaction can be measured reliably.
Let us explore in detail three of the conditions illustrated in Table 1.1.
(a) Risks and Rewards of Ownership and Continuing Managerial Involvement

According to MFRS, in most retail sales, the transfer of risks and rewards of
ownership coincides with the transfer of the legal title or the passing of
possession to the buyer.
If the enterprise retains significant risks and rewards incidental to ownership,

the transaction is not a sale. Hence, revenue is not recognised. MMFRS 118
[para 16] provides examples of situations in which the enterprise may retain
the significant risks and rewards of ownership, as tabulated in Table 1.2.

Table 1.2: Situations and Risks
Types of Risks Explanation

Obligation for When the enterprise retains an obligation for unsatisfactory
unsatisfactory performance not covered by normal warranty provisions.
performance
Derivation of revenue When the receipt of revenue from a particular sale is
contingent on the derivation of revenue by the buyer from
its sale of the goods.
Goods shipped subjected When the shipped goods are subject to installation and the
to installation installation is a significant part of the contract which has
not yet been completed by the enterprise.
BuyerÊs right to rescind When the buyer has the right to rescind the purchase for a
reason specified in the sales contract and the enterprise is
uncertain about the probability of return.
Therefore, we might want to consider the following factors when assessing

the circumstances of the transaction to determine whether significant risks
and rewards have been transferred to the buyer:
(i) Whether any significant acts of performance remain to be completed; (ii)

Whether the seller retains any continuing managerial involvement in,
or effective control of, the goods transferred to a degree usually
associated with ownership; and
(iii) Whether the payment of the debt relating to the goods transferred is
dependent on the derivation of revenue by the buyer from the goods.
Example 2
The revenue arising from sale of a television set should be recognised when it is
delivered. This is despite the fact that the sale is subject to the installation of an
antennae which is a simple process. Therefore, only insignificant risk and
reward of ownership is retained.

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Example 3
We shall now look at the principle of consignment sale. In this case, the
recipient (consignee) undertakes to sell the goods on behalf of the shipper
(consignor). Revenue is recognised by the shipper when the goods are sold by
the recipient to third parties.
Revenue is not recognised at the point the goods are shipped to the recipient, as
there is no transfer of risks and rewards of ownership of the goods. The shipper
retains ownership until the goods are sold to third parties. The unsold goods
are part of the shipperÊs inventory, even though they are in the hands of the
recipient. The consigned goods should be included in the recipientÊs inventory.
(b) Economic Benefit

Another criterion for revenue recognition is that the economic benefit
arising from the transaction should have a reliable measurement and that
inflow has probably occurred.
In an armÊs length transaction, we can refer to documentary evidence, such

as an agreement or invoice, to provide reliable measurement of economic
benefit. After that, we can recognise revenue from the sale of goods at the
point of sales. If one of these criteria is not met, revenue recognition should
be postponed.
(c) Costs Incurred

The last criterion for the recognition of revenue from the sale of goods is
that the costs incurred or to be incurred in respect of the transaction should
be measured reliably. The matching principle requires that in an accounting
period, costs are matched to related income. Revenue and expenses that
relate to the same transaction should be recognised simultaneously.
Thus, revenue cannot be recognised when the expenses cannot be measured

reliably. In such a situation, any consideration already received for the sale
of the goods is recognised as a liability.

The following example (see Table 1.3), of sales transaction and revenue
recognition, is stated in the Appendix of MFRS 118. Generally, we assume that
the amount of revenue can be measured reliably. It is probable that economic
benefits will flow to the entity and that the costs incurred or to be incurred can be
measured reliably.
Table 1.3: Types of Sales Transactions and Revenue Recognition
Types of Sales Transaction Revenue Recognition

(a) Bills and hold‰ sales, in which When the buyer takes title, provided:
delivery is delayed at the buyerÊs (i) Delivery is probable;
request but the buyer takes title and
(ii) Item is on hand, identified and ready
accepts billing.
for delivery;
(iii) Buyer acknowledges the deferred
delivery; and
(iv) Usual payment terms apply.
(b) Goods shipped subject to conditions: When the buyer accepts delivery and
(i) Installation and inspection. installation and inspection are complete.
Recognised immediately upon the buyerÊs
acceptance when:
 The installation process is simple in
nature. For example, installation of a
factory-tested television receiver which
only requires unpacking and
connection of power and antennae; or
 The inspection is performed only for
the purpose of final determination of
contract prices. For example,
shipments of iron ore, sugar or soya
beans.
(ii) On approval when the buyer has If there is uncertainty about the possibility
negotiated a limited right of of return, revenue is recognised when the
return. shipment has been formally accepted by the
buyer or the goods have been delivered
and the time period for rejection has
elapsed.
(iii) Consignment sales under which When the goods are sold by the recipient
the recipient (buyer) undertakes to a third party.
to sell the goods on behalf of the
shipper (seller).
(iv) Cash and delivery sales When delivery is made and cash is
received by the seller or its appointed agent.

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(c) Lay away sales under which the When the goods are delivered and the
goods are delivered only when the experience indicates that most such sales
buyer makes the final payment in a are consummated, revenue may be
series of instalments. recognised when a significant deposit is
received, provided the goods are on hand,
identified and ready for delivery.
(d) Orders when payment (or partial When the goods are delivered to the
payment) is received in advance of buyer.
delivery for goods not presently held
in inventory. For example, the goods
will still be manufactured or will be
delivered directly to the customer
from a third party.
(e) Sales and repurchases agreements Need to ascertain whether, in substance, the
(other than swap transactions) under seller has transferred the risks and rewards
which the seller concurrently agrees of ownership to the buyer and hence,
to repurchase the same goods at a revenue is recognised. When risks and
later date, or when the seller has a rewards of ownership are retained, the
call option to require the repurchase, transaction is a financing arrangement and
by the seller, of the goods. does not give rise to revenue.
(f) Sales to intermediate parties, such as When the risks and rewards of ownership
distributors, dealers or others for have passed. However, when the buyer is
resale. acting in substance, as an agent, the sale is
treated as a consignment sale.
(g) Subscriptions to publications and Straight line basis over the period in
similar items. which the items are dispatched, for items
of similar value in each period.
Basis of the sales value of the item

dispatched in relation to the total
estimated sales value of all items covered
by the subscriptions, for items that vary in
value from period to period.
(h) Instalment sales, under which the At date of sale, revenue is recognised
consideration is receivable based on sales price. Sales price is the
instalments. present value of instalments receivable,
discounted at an imputed rate of interest
(equivalent cash sale price may be used).
Interest element is recognised as revenue,

as it is earned, on a time proportion basis
that takes into account the imputed rate of
interest.

Real estate sales

(a) Normal sales and seller has no When legal title passes to the buyer. If
further substantial act to perform. equitable interest in a property vests with
the buyer before the title is passed, revenue
is recognised when the risks and rewards
of ownership have been transferred, i.e., at
the time when the equitable interest vests
with the buyer.
(b) Significant acts need to be performed Revenue is recognised as the acts are
after the transfer of equitable and/or performed. For example, based on stage of
legal title. completion in the construction of a
building.
(c) Sale with a degree of continuing The nature and extent of the sellerÊs
involvement by the seller, such that continuing involvement determines how
the risks and rewards of ownership the transaction is accounted for. It may be
have not been transferred. accounted for as a sale, or a financing,
leasing or some other profit-sharing
Examples are sales and repurchase arrangement. If it is accounted for as a sale,
agreements which include put and the continuing involvement of the seller
call options, and agreements may delay the recognition of revenue.
whereby the seller guarantees
occupancy of the property for a
specified period, or guarantees a
return on the buyerÊs investment for
a specified period.
Source: Appendix of MFRS 118
Example 4
Everlasting Sdn. Bhd. is a manufacturer in Penang. At the start of 2013,
Everlasting Sdn. Bhd. shipped RM100,000 in goods to ABC Sdn. Bhd., who is
acting as the manufacturerÊs agent. On 31 December 2013, only RM30,000 worth
of goods had been sold. EverlastingÊs financial year ends on 30 June 2013.
Required
Determine the amount of revenue Everlasting Sdn. Bhd. should recognise as at
30 June 2013 and give an accounting for the unsold goods.
Solution
RM30,000 should be recognised as revenue in the year ending 30 June 2013. In
the case of the unsold goods worth RM70,000, they will be shown as part of the
inventory in the balance sheet of Everlasting Sdn. Bhd.

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Example 5
To spur sales, SenQ Sdn. Bhd. decided to sell electrical products with zero-
interest rate instalment to all customers. On 5 December 2013, Ali bought a flat
screen television for RM8,000. He paid a 10% down payment while the balance
will be paid in 12 monthly instalments from 1 January 2014.
Required
When should revenue be recognised in this case?
Solution
Revenue should be recognised in December 2013.
1.3.2 Recognition of Service Revenue

The main difference in the recognition of service revenue is that we need to
determine the stage of completion for the transaction at the balance sheet date.
This is because we know that performance of services may stretch over several
accounting periods. For instance, we may need three years to complete a flyover.
MFRS 118 [para 21] prescribes that:
„When the outcome of a transaction involving the rendering of services can be

estimated reliably, revenue associated with the transaction should be
recognised by reference to the stage of completion of the transaction at the
balance sheet date‰.
From the above paragraph, we must perform the following:
(a) Estimate the outcome reliably; and
(b) Determine the stage of completion at every balance sheet date.
The outcome of a transaction can be measured reliably when all of the following
conditions are met:
(a) The amount of revenue can be measured reliably;
(b) It is probable that the economic benefits associated with the transaction will
flow to the enterprise;
(c) The stage of completion of the transaction at the balance sheet date can be
measured reliably; and
(d) The costs incurred for the transaction and the costs to complete the
transaction can be measured reliably (MFRS 118 [para 20]).
The recognition of revenue by reference to the stage of completion of a

transaction is commonly referred to as the percentage of completion method.
Under this method, revenue is recognised in the accounting periods in which the
services are rendered. There are a few methods to determine the stage of
completion, including:
(a) Surveys of work performed;
(b) Services performed to date as a percentage of total services to be

performed; and
(c) The proportion of costs incurred to date in relation to the estimated total
costs of the transaction.
ACTIVITY 1.3
Discuss the types of companies which receive service revenue.
When the outcome of a transaction involving the rendering of services cannot be

estimated reliably, revenue should be recognised only to the extent of the expenses
recognised that are recoverable (MFRS [para 26]).
When the outcome of the transaction cannot be estimated reliably but the
enterprise will probably recover the transaction costs incurred, we can recognise
the revenue up to the extent of costs incurred that are expected to be recoverable.
If in a situation where costs incurred are not likely to be recovered, revenue is not
recognised and the costs incurred are recognised as expenses.
SELF-CHECK 1.2
Differentiate the following:
(a) Revenue recognition of sale of goods; and
(b) Revenue recognition of services rendered.

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Example 6
Speedy Sdn. Bhd. is a construction company in Kuala Lumpur. It entered
into a contract with BOB Berhad to build a multi-purpose hall in Kajang. The
total contract price is RM1,000,000. The total cost of the project is estimated
to be RM800,000 and it is expected to take two years to complete. As at
31 December 2013, Speedy incurred RM360,000 and the value of work certified
by an independent architect is RM320,000.
Required
(a) Measure the stage of completion with reference to:
(i) Costs incurred to date; and
(ii) Value of work certified.
(b) Assume it is the policy of Speedy to apply the percentage of completion

method and use cost incurred as the basis to measure stage of completion.
You are required to determine the amount of revenue recognised in the
financial year ended 31 December 2013.
Solution
(a) Stage of completion measured in reference to contract costs incurred to

date is:
= Contract cost incurred to date / Estimated total contract costs
= 360,000 / 800,000 = 45%
Stage of completion measured by value of work certified is:

= Value of work certified / Total contract revenue
= 320,000 / 1,000,000 = 32%
(b) Revenue = 45%  RM1,000,000

= RM450,000

Revenue arising from the use by others of the enterpriseÊs assets, yielding
interest, royalties and dividends should be recognised on the following bases:
(a) Interest should be recognised on a time proportion basis;
(b) Royalties should be recognised on an accrual basis, in accordance with the

substance of the relevant agreement; and
(c) Dividends should be recognised when the shareholderÊs right to receive
payment is established.
Example 7
On 1 December 2013, Star Sdn. Bhd., a small retailer in Kepong, made a fixed
deposit of RM100,000 in Public Bank Berhad. The current interest rate is 3% per
annum payable at the end of each year. The company closes its accounts on 31
December.
As at 31 December 2013, the interest earned by Star Sdn. Bhd. will be

RM100,000  3%  1/12 = RM250.
Example 8
Ozone Technology Sdn. Bhd. obtained secret processes from Top Ozone
Berhad. According to the agreement between them, Ozone Technology Sdn.
Bhd. needs to pay Top Ozone 2% on its net annual sales as royalty payment. In
2013, net annual sales for Ozone Technology Sdn. Bhd. were RM6,000,000.
Based on Ozone TechnologyÊs sales, Top Ozone Berhad should recognise

royalty income of 2%  RM6,000,000 = RM120,000.
Example 9
Hot Stone Sdn. Bhd. owns 100,000 ordinary shares in Excel Berhad. The
directors of Excel Berhad proposed a dividend of 10% for the financial year
ending 31 December 2013, at its annual general meeting on 15 February 2014.
Hot Stone Sdn. Bhd. should recognise the dividend income on 15 February
2014. This is because the company only has the right to receive the dividends
when they are declared.

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The following examples are stated in the Appendix of MFRS 118. It is generally
assumed that the amount of revenue can be measured reliably and it is probable
that the economic benefits will flow to the entity and the costs incurred or to be
incurred can be measured reliably. Table 1.4 explains the types of service rendering
transactions and the corresponding revenue recognition.
Table 1.4: Types of Service Rendering Transactions and Revenue Recognition
Types of Service
Revenue Recognition
Rendering Transactions
Installation fees Installation fees are recognised as revenue by referring to
the stage of completion of the installation, unless they are
incidental to the sale of a product, in which case they are
recognised when the goods are sold.
Servicing fees included When the selling price of a product includes an identifiable
in the price of the amount for subsequent servicing (for example, after sales
product support and product enhancement on the sale of software),
that amount is deferred and recognised as revenue over the
period during which the service is performed.
The amount deferred is that which will cover the expected

costs of the services under the agreement, together with a
reasonable profit on those services.
Advertising Media commissions are recognised when the related
commissions advertisement or commercial appears in public. Production
commissions are recognised by reference to the stage of
completion of the project.
Insurance agency Insurance agency commissions received or receivable which
commissions do not require the agent to render further services are
recognised as revenue by the agent on the effective
commencement or renewal dates of the related policies.
However, when it is probable that the agent will be
required to render further services during the life of the
policy, the commission, or part thereof, is deferred and
recognised as revenue over the period during which the
policy is in force.
Admission fees Revenue from artistic performances, banquets and other
special events is recognised when the event takes place.
When a subscription to a number of events is sold, the fee is
allocated to each event on a basis which reflects the extent
to which services are performed at each event.

Tuition fees Revenue is recognised over the period of instruction.

Initiation, entrance and Revenue recognition depends on the nature of the services
membership fees provided. If the fee permits only membership and all other
services or products are paid for separately, or if there is a
separate annual subscription, the fee is recognised as revenue
when no significant uncertainty as to its collectability exists.
If the fee entitles the member to services or publications to

be provided during the membership period, or to purchase
goods or services at prices lower than those charged to non-
members, it is recognised on a basis that reflects the timing,
nature and value of the benefits provided.
Fees from the Fees from the development of customised software are
development of recognised as revenue in reference to the stage of
customised software completion of the development, including completion of
services provided for post-delivery service support.
1.4 DISCLOSURE REQUIREMENTS
MFRS 118 [para 35(a)] requires an enterprise to disclose 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.
MFRS 118 [para 35(b)] requires the disclosure of revenue arising from the
following:
(a) Sales of goods;
(b) Income from the rendering of services;
(c) Interest;
(d) Royalty;
(e) Dividends; and
(f) The amount of revenue arising from exchanges of goods or services

included in each significant category of revenue.

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The Ninth Schedule of the Companies Act 1965 requires the separate disclosure
of the following income items:
(a) Income received from any shares and debentures listed on Bursa Malaysia;
(b) Income received from any shares and debentures traded on any stock
exchange outside Malaysia;
(c) Income received from other sources;
(d) Interest income other than from debentures; and
(e) Income from rent of land and buildings.
ACTIVITY 1.4
Find out how revenues are presented and disclosed in annual

audited accounts from the Bursa Malaysia website at
http://www.bursamalaysia.com/market/.
The following example is taken from the notes to the accounts of an annual
report of a Malaysian company. It illustrates the accounting policy for revenue and
disclosure practice based on MFRS 118 on revenue.
Example 10
CAB CAKARAN CORPORATION BERHAD
Year ended 30 September 2013
Extract from notes to accounts
Significant Accounting Policies
Revenue
Revenue is measured at the fair value of the consideration received or
receivable. Revenue is reduced for estimated customer returns, rebates and
other similar allowances.

Revenue from the sale of goods is recognised when all the following conditions
are satisfied:
(a) The group has transferred to the buyer the significant risks and rewards
of ownership of the goods;
(b) The group retains neither continuing managerial involvement to the
degree usually associated with ownership nor effective control over the
goods sold;
(c) The amount of revenue can be measured reliably;
(d) It is probable that the economic benefits associated with the transaction
will flow to the group; and
(e) The cost incurred or to be incurred in respect of the transaction can be
measured reliably.
Franchise income is generally recognised from the acceptance and

commencement of the franchise under agreement entered into by the
franchisees. Royalty income is recognised on an accrual basis in accordance
with the substance of the relevant agreements.
Rental income is accrued on a time basis, in reference to the agreements

entered. Interest revenue is recognised using the effective interest method.
Dividend income is recognised when the shareholderÊs right to receive
payment is established. Management fee and other income are recognised on
an accrual basis.
Revenue
The Group The Company
2014 2013 2014 2013
RM RM RM RM
Sale of goods 494,381,158 556,017,650 ă ă

Franchise income: 30,000 ă
Rental 4,100
Royalties income 2,218 29,175 ă ă
Management fee ă ă 180,000 180,000
494,417,476 556,046,825 180,000 180,000
Source: http://announcements.bursamalaysia.com

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1.5 CONSTRUCTION CONTRACTS

(APPLICATION OF MFRS 111)
(a) Construction Contracts
A construction contract is a „contract specifically discussed for the
construction of an asset or a combination of assets that are closely
interrelated or interdependent in terms of design, technology and function
or their ultimate purpose or use‰.
MFRS 111 applies to contracts to provide services directly related to the

construction of an asset, such as services of architects. This standard
includes contracts for the restoration or demolition of assets, and the
restoration of the environment following the demolition of assets. MFRS
111 will gives guidance to the allocation of revenue and cost incurred and
the disclosure of items in the financial statements.
(b) Contract Revenue

Contract revenue consists of:
(i) Contract price; and
(ii) Variations, claims and incentive payments that are probable and
reliably measurable.
The measurement of contract price is usually not a problem in practice as

this is either the contract value agreed in the case of fixed price contracts, or
the allowable costs incurred plus a fixed fee or percentage, in the case of a
cost plus contract.
The amount of contract revenue may increase or decrease from one time to
the next due to a variation order or an instruction from the customer for a
change in the scope of the work to be performed under the contract, and
this includes changes in the specifications or design of the asset and
changes in the duration of the contract. A variation is included in the
measurement of contract revenue only when it is probable that the
customer will approve the variations and the amount of the revenue arising
from the variation can be reliably measured.
(c) Illustration:
A contractor commences work on a construction contract on January 1st,
2014. The contract price is RM10,000,000 with an incentive payment of
RM1,000,000 if the construction is completed on or before 31 December
2015. When accounting for the construction contract in the early stages, the
contractor shall exclude the incentive payment in the measurement of the

contract revenue. However, when the contract is in the advanced stage,

with regard to the stage of completion achieved, the contractor may conclude
that it is probable the early completion will be met. In this case, the
contractor shall include the incentive payment in the revised estimate of the
contract revenue.
(d) Contract Cost

Contract cost consists of:
(i) Direct cost;
(ii) Attributable cost; and

(iii) Other costs as are specifically chargeable to the customer under the
terms of contract.
The measurement of contract costs commences from the date of securing

the contract to the final completion of the contract. Costs that relate directly
to a contract and which are incurred in securing the contract are also
included as part of the contract costs if they can be separately identified and
measured reliably and it is probable that the contract will be obtained.
However, in the early stages of a negotiation for a contract, costs incurred
are normally recognised as an expense in the period in which they are
incurred, and they are not reinstated for inclusion in the contract costs
when the contract is obtained in a subsequent period.
(e) Identification of Construction Contracts

A construction contract includes contracts for the construction of highways,
dams, buildings, bridges, pipelines, ships and tunnels. Also, the definitions
in the standard encompass:
Contracts for the rendering of services which are directly related to the
construction of the asset, such as services of project managers and
architects; and
Contracts for the destruction or restoration of assets, and the restoration of

the environment following the demolition of assets.
(f) Percentage of Completion Method

The initial step is to determine the outcome of the construction contract.
Where the outcome can be estimated reliably, then at the balance sheet
date, the contract revenue and costs are recognised as revenue and
expenses by referring to the stage of completion of the contract. This is
known as the percentage of completion.

23
(g) Disclosure Requirements

Following are disclosures required:
(i) Contract revenue recognised in the period.
(ii) Contract cost recognised in the period.
(iii) Method used to determine contract revenue.
(iv) Method used to determine the stage of completion of contract in

progress.
(v) For each contract:
 The aggregate costs incurred and recognised profits;
 Amount of advances received; and
 The amount of retentions.
(vi) Gross amount due from and due to customer.
(vii) Any contingent liabilities and contingent assets.
 Income includes revenue and gains.
 Revenue arises from the course of the ordinary activities of an enterprise.
 Revenue gives rise to a net inflow of economic resources that may either
increase the assets or reduce liabilities.
 Issues to consider are at what point is revenue recognised and the amount
that can be recognised.
Fair value Revenue

Income Reliability
Probable

1. King Enterprise sells goods to its customers on a sale on return basis.

Customers may return products bought if they are not satisfied.
Required
What are the conditions that must be satisfied before revenue can be
recognised?
2. Reliability is one of the important criteria in determining the timing of

revenue recognition. Discuss.
3. Consider the following cases in which the accounting year ends on

31 December.
(a) Cari Emas Sdn. Bhd. sold a piece of equipment for RM1,200,000 to
ABD Sdn. Bhd. Cari Emas Sdn. Bhd. collected RM440,000 from ABD
Sdn. Bhd. on 31 December 2013. Based on the agreement, the balance
is subject to 5% interest and is payable on 31 December 2014. Cari
Emas Sdn. Bhd. will deliver the equipment on 15 February 2014. ABD
Sdn. Bhd. has excellent credit rating in the industry.
(b) Sonex Sdn. Bhd. sold 10 units of its products for RM8,000 to
Wonderful Life Sdn. Bhd. on 15 October 2013. The buyer will
„contra‰, or exchange, the products with five units of its own goods.
The buyer promised to deliver the goods on 31 January 2014.
(c) Tan Tan is a magazine publishing company. On 1 March 2013, it

collected RM2,880 for a two-year subscription of a monthly journal,
National History Discovery, from a subscriber. The May 2013 issue is
the first mailed to the subscriber.
Required
For each of the above cases:
(a) Advise on the revenue recognition method that should be used.

Justify your answer.
(b) Prepare journal entries to reflect the transaction, if any.

25
1. You are required to state the date when revenue should be recognised in
the following cases. The financial year-end is 31 December 2013.
(a) ISI Electrical in Kajang sold a television for RM30,000. It was sent to
the customer on a 14-day „sale on return basis‰ on 12 December 2013.
The television was not returned on 31 December 2013.
(b) Abu, an insurance agent for an international company, received

RM4,000 in commission from selling a 30-year life insurance policy.
(c) On 2 November 2013, IFEEL Furniture Sdn. Bhd. received RM1,000

from a customer as down payment for a dining furniture set and signed
an agreement. The balance will be paid in 12 monthly instalments from
1 December 2013.
(d) On 1 November 2013, ACB Sdn. Bhd. received RM40,000 in ticket

sales for a concert to be staged by Girl Ga Ga in February 2014.
(e) RM2,000 was received from a customer for a Chinese ceramic vase.
The customer can take the vase after paying another RM2,000.
(f) A gift shop in Sungai Long received RM50 from a young girl on
30 December 2013 to deliver a bouquet of flowers to her boyfriend on
7 January 2014.
2. The following are independent transactions by various business enterprises

with financial year ending 31 December 2013.
(a) Chong Enterprise put RM20,000 in a fixed deposit account in Sakura

Bank for a 12-month period on 1 March 2013. The interest rate is 3% per
annum.
(b) Institute Maju Jaya collected a tuition fee of RM600 each from
500 students in August 2013. Only 300 students attended tuition in
2013, while the rest will do so from 1 January 2014.
(c) Quick Save Sdn. Bhd. gave a contract of RM100,000 to a multinational

company to install wiring in August 2013. Piecemeal Services only
managed to complete 50% of the work by 31 December 2013.

(d) Ms Dolly is a customer of Modern Furniture Trading. She has

instructed the company to make a delivery of goods costing
RM3,000 only after 14 February 2014. However, delivery is made on
31 December 2013. Full payment has been received by Modern
Furniture Trading.
(e) Star Music will organise a cultural performance at Stadium Merdeka

on 31 March 2014 to raise funds for disabled children in Sungai Buloh.
As at 31 December 2013, 6,000 tickets, worth RM300 each, have been
sold.
Required
Explain briefly when revenue should be recognised and determine the
amount.

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c  Revenue

Revenue refers to one of the sources of income of an organisation. Revenue

Copyright © Open University Malaysia (OUM)

1.1 REVENUE (APPLICATION OF MFRS 118)

It is important to note that a private entity is a private company incorporated

(b) A subsidiary or associate of, or jointly controlled by, an entity which is

MFRS 118 defines revenues as:

Copyright © Open University Malaysia (OUM)

Now, let us consider a situation where a hotel receives compensation for

„Increases in economic benefits during the accounting period in the form of

Can you differentiate among sale, income and revenue? Explain.

Copyright © Open University Malaysia (OUM)

1. In the case of a trading company, what are its ordinary activities?

1.2 MEASUREMENT OF REVENUE

Revenue = 5,000 units  RM100  90%

Copyright © Open University Malaysia (OUM)

1.3 REVENUE RECOGNITION

After determining the amount to be recorded, we now need to determine the

Figure 1.1: Operating cycle of a trading company

It is necessary to determine a point in the operating cycle at which to recognise

Copyright © Open University Malaysia (OUM)

According to MFRS, revenue is recognised when it is probable that future

In short, we can recognise revenue when the revenue is measurable and it is

Copyright © Open University Malaysia (OUM)

1.3.1 Recognition of Sales of Goods

Table 1.1: Conditions that Permit the Recognition of Sales of Goods

Let us explore in detail three of the conditions illustrated in Table 1.1.

(a) Risks and Rewards of Ownership and Continuing Managerial Involvement

If the enterprise retains significant risks and rewards incidental to ownership,

Copyright © Open University Malaysia (OUM)

Table 1.2: Situations and Risks

Types of Risks Explanation

Therefore, we might want to consider the following factors when assessing

(i) Whether any significant acts of performance remain to be completed; (ii)

Copyright © Open University Malaysia (OUM)

(b) Economic Benefit

In an armÊs length transaction, we can refer to documentary evidence, such

(c) Costs Incurred

Thus, revenue cannot be recognised when the expenses cannot be measured

Copyright © Open University Malaysia (OUM)

Table 1.3: Types of Sales Transactions and Revenue Recognition

Types of Sales Transaction Revenue Recognition

Copyright © Open University Malaysia (OUM)

Basis of the sales value of the item

Interest element is recognised as revenue,

Copyright © Open University Malaysia (OUM)

Real estate sales

Source: Appendix of MFRS 118

Copyright © Open University Malaysia (OUM)

1.3.2 Recognition of Service Revenue

MFRS 118 [para 21] prescribes that:

„When the outcome of a transaction involving the rendering of services can be

From the above paragraph, we must perform the following:

(a) Estimate the outcome reliably; and

(b) Determine the stage of completion at every balance sheet date.

(a) The amount of revenue can be measured reliably;

The recognition of revenue by reference to the stage of completion of a

(b) Services performed to date as a percentage of total services to be

Discuss the types of companies which receive service revenue.

When the outcome of a transaction involving the rendering of services cannot be

Differentiate the following:

(a) Revenue recognition of sale of goods; and

(b) Revenue recognition of services rendered.