How to Determine Revenue – Financial Reporting Standard 18
Every business generates income, and different individuals have different methods to measure this revenue. The majority of company owners (Also see Most Welcomed Business Trends In Malaysia) assume that the actual payment amount banked in is profits. Revenue is in fact determined using other terms. For instance, how to measure the revenue from a transaction if the consumer wants to exchange the products?
The FRS 18 provides the correct standards about the measurement of revenue as this has implications when it comes to income tax (Also see Financial Reporting Standard 12 Income Taxes). If you are not confident in getting it right, an alternative is to engage an accounting firm in Johor Bahru to help you.
According to FRS 18, all revenue made by a business need to be measured as consideration received. This suggests that the quantity of revenue received from any transaction is decided through a mutual contract between the seller and the purchaser. You should always measure the revenue for every transaction about the fair value of what services you offer or what your customers spend on the goods. You have to consider the volume of discount and rebates rates that your company gives to its customers.
Sometimes, customers pay in cash or cash equivalents (Also see How to Manage Your Business Cash Flow). This amount of revenue equates to the amount of cash received if this payment is paid promptly (Also see Accounting – 5 tips to make your clients pay on time). If the customers make differed payments, the fair value of the payment would be less than the nominal cash received.
For instance, your company might give interest-free credit to customers or take on a receivable note that bears the rate of interest rate that is lower than the rate of market interest from a consumer as payment for products. If this plan makes up a financing transaction, you will use the imputed interest rate to measure the fair value by discounting future invoices.
Some exchanges do not result in revenues, such as products or services are switched for other items and services that have similar worth. These transactions are typical with products such as oil or milk where providers swap such items in various areas to satisfy the demand for the commodities in a specific area.
In these cases, it is hard to measure the fair value of the products and services received after the exchange (Also see The Common Accounting Challenges SMEs Need to Deal With). Hence, you need to determine the revenue at the fair value of the items or services offered. You have to adjust the fair value by the quantity of any cash equivalent or cash transferred.