IAS 18 & IAS 11

IAS 18 and IAS 11 - Critical Evaluation

IAS 18 and IAS 11 - Critical Evaluation

Introduction

The International Accounting Standards are a set of rules or laws that establish the information to be presented in the financial statements and how that information should appear in those states. IASs are not physical or natural laws awaiting their discovery, but are rules according the business experiences, that are considered essential in the presentation of financial information.

They are high quality investor oriented accounting standards whose aim is to reflect the economic substance of business operations, and present a true and fair view of the financial position of a company. IAS is issued by the International Accounting Standards Board (IASB, former International Accounting Standards Committee, IASC) (IFRS, 2012).

International Accounting Standard 18

International Accounting Standard 18 (IAS 18) relates to revenue recognition. IAS 18 has developed the theme of income as part of the financial statements that was previously defined in conceptual framework in 1989. This International Standard is set, in this way, as a basic rule of development of the conceptual framework of accounting at the time to understand the concept of recognition and measurement criteria of this element of the financial statements in its specific application to the below mentioned revenue recognition criteria's (Ko, 2011).

The standard has been amended and revised number of times mainly to ensure that it has high quality accounting standards with respect to revenue recognition. The standard applies to revenue resulting from;

A) The sale of products.

(B) The provision of services.

(C) The use by others of enterprise assets yielding interest, royalties and dividends.

The standard IAS 18 after its introduction has suffered three architectural modifications to incorporate references to other international standards and to further narrow the field of analysis and collect avoiding specifics that are already addressed by other specific rule created for this purpose. Thus, in 1998 and 1999 paragraphs 11 and 36 were modified to incorporate references to IAS 39 and 10 respectively. In January 2001, an amendment was made to paragraph 6 to specifically exclude aspects of initial recognition and changes in fair value of biological assets related to agricultural activity (appearance in IAS 41 Agriculture) of the cases in IAS 18 (Barth 2008, 467-498). Based on the definition of revenue and the criteria for recognition and measurement in financial statements presented in the conceptual framework of the IASB, IAS 18 has as main objective to establish the accounting treatment of revenue arising from the sale of specific operations goods, services and obtaining interest, royalties and dividends.

Revenue is only recognized as per the standards when the transaction is linked with the economic benefits. In some instances, there may not be a probability unless a consideration is received or uncertainties are removed. When permissions are granted and there is an assurance that uncertainties are removed, revenue may be recognized. Whereas, when there is an uncertainty about the collection of an amount that is already recorded as revenue, that amount would be recognized as an expense instead of adjusting ...