One of the primary objectives of every business is to generate revenue. According to the Framework for Preparation and Presentation of financial statements (See Accounting – FRS 1: Presentation of the Financial Statements), income is the increment in economic benefits within a specified accounting period. This increment is usually in the form of decreased liabilities or increased assets that lead to increased equity.
Note that income encompasses both gains and revenue. Revenue is simply the income that is realized from ordinary business activities. Accountants use terms such as sales, dividends, royalties, and interest to refer to revenue. The primary objective of the FRS 18 is to prescribe the right approach to use when accounting for revenue that arises from various events and types of transactions.
Most business owners may not be sure of when to recognize business revenue in the financial statements, although this can be easily resolved by using an accounting service in Singapore. This can make it hard for a business owner to recognize revenue in the financial statements correctly. According to FRS 18, revenue should be recognized when you are sure that future economic benefits that can be measured reliably will flow to the business.
Scope of FRS 18
Every accountants in Singapore should apply this standard for accounting for revenue that may arise from the following events and transactions:
- Sale of products
- Rendering of service
- Interest, dividends, and royalties that a gained when other entities use the business’s assets.
According to this standard, goods are the products that a business produces with the aim of selling them. Also, the products that are purchased for reselling are also referred to goods. When other entities use your business’s assets, the revenue arising from such activity is in the following forms:
- Royalties – this is the charge for the use of a business’s non-current assets such as trademarks, copyrights, computer software and more.
- Interest – these are the charges for using cash equivalents or cash belonging to the business.
- Dividends – these are the distributions of business gains to shareholders. These distributions are proportional to the shareholder’s holdings of a particular class of capital.
Note that the FRS 18 doesn’t deal with revenue that arises from the following:
- Lease agreements
- Dividends that arise from investments which are accounted for using the equity method
- Insurance contracts included within the scope of Financial Reporting Standard 104 (Insurance Contracts)
- Variations in the fair value of financial liabilities and financial assets
- Variations in the value of other current assets
- Extraction of mineral resources
- First recognition of Agricultural produce
Understanding the scope and the objectives of the FRS 18 will enable you to make sound decisions especially when it comes to recognizing revenue in your business’s financial statements. Check out our next post on How to measure revenue – FRS 18 to learn how you can apply it in preparation of financial statements.