Page 22 - CIMA May 18 - MCS Day 2 Suggested Solutions

SUGGESTED SOLUTIONS

Accounting for revenue

Revenue is recognised in the financial statements based upon the requirements of IAS 18
Revenue (IAS 18).

IAS 18 defines revenue as the gross inflow of economic benefits during the period arising in the
course of ordinary activities of an entity. Revenue from the rendering of services should be
recognised when all of the following criteria have been complied with:

 it can be measured reliably
 it is probable that economic benefits will flow to the entity
 the stage of completion of the transaction can be measured reliably
 the cost of providing the service can be reliably measured by the seller
For passengers paying by cash or debit or credit card at the point of making a journey, revenue
can be recognised at that point.

Some passengers may pay in advance for a specified journey, for example making an inter‐city
journey by a specified route on a specific date. In this situation, recognition of revenue should be
deferred until either the journey has been taken, or validity of the ticket has expired. This could
be checked either by the driver accepting a paper document to allow a passenger to travel, or by
the issue of smart tickets stored on smartphone and accepted by a smart reader on a bus when a
passenger boards a bus.

Accounting for the sale of multi‐ride or season tickets will be similar to accounting for payment
received in advance from passengers. Customer may be issued with a book of paper tickets which
are hole‐punched or marked in some way, or given up to the driver for each journey taken.
Alternatively, smart technology could be used to load a smart card with the journeys purchased in
advance, and a smart reader on each bus would record each time a journey is made, with the
balance remaining on the smart card reduced accordingly.

As a practical point, reliance upon technology for passengers to book, pay and use travel may help
to apply a consistent and reliable revenue recognition policy. A risk in this situation arises if there
is a technology or systems failure – how does a passenger book travel in advance, and/or how do
they prove that a valid booking has been made?

Financial Manager

KAPLAN PUBLISHING 109