In the case of income from ordinary activities from the sale of goods, provision of services and construction contracts, there are specific rules that determine certain conditions for the recognition of income from these activities, which are based on general recognition criteria. . We present the following:

a) Construction contracts

In the case of this activity, IAS 11 Construction Contracts defines the conditions that must be met for the recognition of revenue from this activity. In effect, paragraph 22 states that when the outcome of a construction contract can be estimated with sufficient reliability, revenue from ordinary activities must be recognized as such, with reference to the state of completion of the activity produced by the contract at the end of the contract. reporting period. This mechanism is commonly called the degree of advance method. Under this method, revenue will be recognized based on the degree of progress of the works. The aforementioned can be graphed using the following formula:

It is important to mention that the degree of completion of a contract can be determined in many ways, and the company must use the method that most reliably measures the work performed. Under paragraph 30 of IAS 11, the methods may include (depending on the nature of the contract):

The proportion of contract costs incurred on work already performed to date in relation to the estimated total costs for the contract.
Inspection of the executed works.
The physical proportion of the total contract already executed.

b) Income from ordinary activities from the sale of goods

In the case of income from ordinary activities from the sale of goods, IAS 18 is in charge of defining the criteria to be met for its recognition. Thus, paragraph 14 of this IAS prescribes that revenue from ordinary activities from the sale of goods must be recognized and recorded in the financial statements when each and every one of the following conditions is met:

The entity has transferred to the buyer all significant risks and rewards of ownership of the goods.
The entity does not retain for itself any involvement in the current management of the goods sold, to the degree usually associated with ownership, nor does it retain effective control over them.
The amount of revenue from ordinary activities can be reliably measured.
It is probable that the entity will receive the economic benefits associated with the transaction.
The costs incurred, or to be incurred, in connection with the transaction can be measured reliably.

It should be considered that only if all of the aforementioned requirements are met, revenue from ordinary activities will be recognized; Otherwise, if one or more of these conditions are not met, no income should be recognized.

c) Income from ordinary activities from the provision of services

In the case of income from ordinary activities derived from the provision of services, the element to be analyzed will be the effective provision thereof. For example, if the service is fully provided at a single moment (this would be the case, for example, of the photocopying of documents), the income from ordinary activities should be recognized at that moment, not generating a complex situation.

However, if the service is provided at different times and/or periods, paragraph 20 of IAS 18 regulates the so-called “degree of completion method” through which income is recognized based on the work performed. Indeed, according to this paragraph, when the result of a transaction, which involves the provision of services, can be reliably estimated, the income from ordinary activities associated with the operation must be recognized considering the degree of completion of the provision at the end of the period. about which it is reported.

In this context, said paragraph continues, the result of a transaction can be reliably estimated when each and every one of the following conditions is met:

The amount of revenue from ordinary activities can be reliably measured.
It is probable that the entity will receive the economic benefits associated with the transaction.
The degree of completion of the transaction, at the end of the reporting period, can be reliably measured.
The costs incurred in the transaction, and the costs to complete it, can be reliably measured.

From the previous paragraph it is concluded that, in the case of services whose execution stage includes several periods, the corresponding income should be recognized as it is provided, unless the conditions indicated therein could not be met.

d) Income from ordinary activities derived from the use, by third parties, of the entity’s assets

This income that produces interest, royalties and dividends must be recognized in accordance with the following bases, provided that i) it is probable that the entity will receive the economic benefits associated with the transaction and ii) the amount of income from ordinary activities can be measured reliably:

Interest must be recognized using the effective interest rate method.
Royalties must be recognized using the accrual (or accrual) basis according to the substance of the agreement on which they are based.
Dividends must be recognized when the shareholder’s right to receive them is established.

Source: The Peruvian