On the Definitions of Income and Revenue in IFRS

Abstract

In a previous issue of this journal, Richard Barker addressed some problems with the IFRS definitions of income and profit. I apply his conclusions to the definition of ‘revenue’ that he did not cover. I point out other difficulties with the definition: the implication that some sales to customers are not revenue, the implication that receipts to settle accounts receivable (or to sell receivables to a bank) are revenue, and the out-dated term ‘ordinary activities’. Most of the problems with the definition of revenue remain in the IASB's exposure drafts of 2010 and 2011. I also suggest that, despite IASB statements, fair value gains on assets should not be considered to be revenue, and nor should the financial receipts of non-financial companies. This leads to the suggestion that a replacement for IAS 18 should deal with the wider topic of ‘income’, and then define ‘revenue’ more narrowly than at present as the gross increase in equity resulting from inflows from customers for certain types of performance under contracts.

Acknowledgements

The author is grateful for comments on an earlier draft from Richard Barker, Ken Rigelsford, Jan McCahey, Christopher Napier, R. H. Parker and Christian Stadler, and from the editor and two reviewers of this journal.

Notes

‘Income is an increase in equity, excluding contributions from equity participants, capital maintenance adjustments and changes in other reserves’ (Barker, 2010, p. 154).

For example, there are complaints about this from the Committee of European Securities Regulators (CESR/10-910 of 19 September 2010) and from the European Financial Reporting Advisory Group (published draft comment letter to IASB, 10 September 2010).

This appeared in the 2007 version of IAS 1(para. 82). It disappeared in the 2011 version, to be replaced by ‘comprehensive income’ (para. 81A), except that IG 5A of IAS 1 still refers to ‘total comprehensive income’.

Noted by Barker (2010) in his footnote 15.

I am grateful to Christopher Napier for pointing out this third problem.

In practice, under IAS 18, the total revenue would be measured as only €12 (not twice that) because the second inflow would not newly trigger the recognition criteria (IAS 18, para. 14), although it would satisfy them.

This problem was earlier pointed out in Australia; see the dissenting view of Wayne Lonergan on the AASB's Statement of Accounting Concepts No. 4 of March 1995.

Para. BC 63 of 2007 version of IAS 1.

‘Revenue is the gross inflow of cash, receivables or other consideration arising in the course of the ordinary activities of an enterprise from the sale of goods, from the rendering of servicers, and from the use by others of enterprise resources yielding interest, royalties and dividends’ (para. 4).

IAS 8 (of 1978), para. 9.

For example, this would be the case for France (e.g. Scheid and Walton, 1992, pp. 143–147). It would also be true for Italy and Belgium.

FRS 3 (para. 2) as issued in October 1992. The IAS 8 amendment was dated November 1993.

Originally, the 1981 Act, then the 1985 Act, now the 2006 Act. The Act does not define ordinary or extraordinary.

The chairman of the Steering Committee that wrote IAS 1 was a German, Heinz Kleekämper (Camfferman and Zeff, 2007, p. 521). The influence of the Fourth Directive is noted by Kirsch (2006, p. 319).

The IASB carried this narrow idea forward in para. BC 64 of the 2007 version of IAS 1.

Nothing must be presented as extraordinary; and any remaining scope for the concept is very small. See the discussion above about ‘extraordinary’ in IAS 8. As noted earlier, the IASB carried this narrow idea forward in para. BC 64 of the 2007 version of IAS 1.

There is no restriction to cases of increased equity; there is no reference to ‘ordinary’; and the reference to ‘as an entity carries out activities’ might avoid the double counting of cash and receivables.

Section 474 of the Companies Act 2006 defines ‘turnover’ as ‘amounts derived from the provision of goods and services within the company's ordinary activities'.

I accept the point made by Napier and Power (1992, p. 86) that identification, recognition and measurement are interrelated. Nevertheless, some approximate concept of what is intended by ‘revenue’ must surely be established before progress can be made.

For example, British Land has ‘Net rental and related income’ as the first line of its income statement. The fair value changes on investment properties are shown six lines later after administrative expenses (Annual Report, 2011, p. 134 and note 6).