Accounting – FRS 18: How to Measure Revenue
Every business entity in Singapore generates revenue, and different people have various ways of accounting this revenue. Most business owners assume that the amount of payment received is the revenue. Well, we don’t dispute this but in some cases, you will need to measure revenue using other terms. For example, how will you measure revenue resulting from a transaction where the customer wants to exchange goods (Also see How to Recognize Revenue when Rights of Return are Present)? The FRS 18 offers the right guidelines regarding measurement of revenue (Also see FRS 18: Revenue).
It is important to examine your approach to revenue measurement and find out if it is in line with the guidelines set by the FRS 18 since this plays a crucial role in your Statement of Comprehensive Income.
According to FSR 18, all revenue earned by a business should be measured of the consideration (normally payment) received. This implies that the amount of revenue gained from any transaction is determined by mutual agreement between the seller (the business) and the buyer. Note that you should measure revenue for each transaction based on fair value of what your clients pay for the goods or services that you offer. You should also take into account the volume of rebates and discounts that your business offers to its clients.
In most cases, clients pay in cash or cash equivalents. If this payment is paid promptly, the amount of revenue equals the cash received. If the clients prefer making differed payments, then, the fair value of the payment will be less than the nominal cash received.
For example, your business may offer interest-free credit to clients or accept a receivable note that bears an interest rate that is lower than the market interest rate from a customer as payment for goods. If this arrangement constitutes a financing transaction, then, you will use the imputed rate of interest to determine the fair value by discounting future receipts.
If services or goods are swapped for other goods and services that are of similar value and nature, such exchanges don’t result in revenue. Such transactions are common with commodities such as milk or oil where suppliers swap such goods in different locations to fulfill a demand for one of the commodities in a particular location.
In such cases case, it is difficult to measure the fair value of the services and goods received after the exchange. Therefore, the accountant should measure the revenue at the fair value of the services or goods given up. You should also adjust the fair value by the amount of any cash equivalent or cash transferred. No worries, if you find this too complicated for you, sign up for our accounting service in Singapore and outsource the headache to us.