Accounting Standards – 9 REVENUE RECOGNITION: Accounting Standards – 9 REVENUE RECOGNITION Batch-2012-14 Presentation of FINANCIAL MANAGEMENT PRESENTED BY:- Deepak Kumar Singh-BA1215 Nilesh Dhumale BA – 1226 Vasudev BA-1251 Rahul yadav BA-1237 OBJECTIVES : OBJECTIVES Recognition of revenue in the statement of profit and loss account arising in the ordinary course of business i.e. from The Sale of Goods The Rendering of Services The use by Others of enterprise resources yielding interest, royalties and dividends. APPLICABILITY: APPLICABILITY This standard does not apply to:- Revenue arising from Construction Contracts. Revenue arising from Hire Purchase or Lease Agreements. Revenue arising from Government Grants or Other Similar subsidies. Revenue of Insurance Companies arising from insurance business. DEFINITIONS: DEFINITIONS The following terms have been used in this standards:- Revenue Completed Service Contract method Proportionate completion method Cont…: Cont… REVENUE:- Revenue is the gross inflow of cash, receivables or other consideration arising in the course of ordinary activities of an enterprise from the sale of goods, from the rendering of services and from the use by others of enterprise resources yielding interest, royalty and dividend. Revenue is measured by the charges made to customers or clients for goods supplied and services rendered to them and by the charges and rewards arising from the use of resources by them. In an agency relationship, the revenue is the amount of commission and not the gross inflow of cash, receivable or other consideration. Cont…: Cont… COMPLETED SERVICE CONTRACT:- Completed Service Contract method is a method of accounting which recognises revenue in the statement of profit and loss only when the rendering of services under a contract is completed or substantially completed. PROPORTIONATE COMPLETION METHOD:- Proportionate completion method is a method of accounting which recognises revenue in the statement of profit and loss proportionately with the degree of completion of services under a contract. REVENUE RECOGNITION: REVENUE RECOGNITION Revenue recognition concerned with the timing of recognition of revenue in the income statement of an enterprise. The amount of revenue arising on a transaction depends on the agreement between the parties involved in the transaction. When uncertainties exists regarding the determination of the amount, it may influence the timing of revenue recognition. Cont…: Cont… Revenue from sales or service transactions should be recognized the performance of conditions is satisfied. If at the time of raising of any claim ultimate collection of revenue is not expected, revenue recognition should be postponed. A. SALE OF GOODS: A. SALE OF GOODS The seller has transferred the property in the goods to the buyer for a consideration. The transfer of property in goods in most cases results in or coincides with the transfer of significant risk and reward of ownership to the buyer. There may be the case where transfer of property in goods does not coincide, the transfer of significant risk and rewards of ownership. The time for recognising the revenue in both the point no. 2 and 3 above, is only when the risks and reward of ownership is transferred to the buyer. When to recognise the revenue in following cases?: When to recognise the revenue in following cases? Sales against advance payment received. When full or partial payment is received for the goods not presently held in stock i.e. stock is still to be manufactured or is to be received directly by the customer from a third party. Revenue from such sales should not be recognised until goods are manufactured, identified and ready for delivery to the buyer by the third party. Cont…: Cont… 2. Delivery delayed at buyer’s request but buyer accepts title/billing. The seller should recognise the revenue even if goods are not dispatched provided the goods are ready, buyer takes title and accepts billing and the seller holds the goods in his premises on behalf of buyer i.e. revenue is recognised when risk and reward of ownership are transferred. Cont…: Cont… 3. Barter transactions As per IAS 18 “Revenue” – When goods or services are exchanged or swapped for goods or services which are of a similar nature and value, the exchange is not recorded as transaction which generates revenue but when goods are sold or services are rendered in exchange for dissimilar goods or services, the exchange is regarded as transaction which generates revenue and the revenue is measured at the fair value of goods or services received, adjusted by the amount of any cash or cash equivalent transferred. When the fair Cont…: Cont… value of goods or services received can not be measured reliably, the revenue is measured at the fair value of the goods or services given up, adjusted by the amount of any cash or cash equivalent transferred. Cont…: Cont… Delivery subject to conditions Installation and inspection Normally revenue should not be recognised until the customer accepts the delivery of the goods and installation & inspection are complete. However, in some cases the installation process are simple, in such cases it is appropriate to recognise the revenue even if installation is not complete. E.g. Installation of Television or Refrigerator. Cont…: Cont… b) Approval Revenue should not be recognised until the goods have been formally approved and accepted by the buyer or the buyer has done the act adopting the transactions or the time period for rejection has elapsed or where no such time is fixed, a reasonable time has elapsed. c) Guaranteed Sales i.e. delivery is made giving the buyer unlimited right of return. Recognition of revenue in this case depends on the substance of transactions/agreement. E.g. in case of retail sales offering a guarantee of “Money back if not completely satisfied”, it may be appropriate to recognise the sale but suitable provision for returns based on the past experience is made. Cont…: Cont… d) Consignment Sales Revenue is not recognised until the goods are sold to the third party. e) Cash on delivery Sales Revenue should not be recognised until cash is received by the seller or his agent from buyer. 5. Sale by instalment payment – Delivery of goods on final payment Revenue from such sales should not be recognised until goods are delivered. However, when experience indicates that most such sales have been consummated, revenue may be recognised when a significant deposit is received. Cont…: Cont… 6.Instalment Sales When the consideration is receivable in installments , revenue attributable to the sales price exclusive of interest should be recognised at the date of sale. The interest element should be recognised as revenue, proportionately to the unpaid balance due to the seller. 7. Sale/Repurchase Agreement When seller concurrently agrees to repurchase the same goods at a later date. - For such transactions that are in substance a financing agreement, the resulting cash inflow is not revenue as defined and should not be recognized as revenue. The same treatment would apply when the seller has a call option to repurchase the buyer has put option to require the repurchase by the seller of the goods. REVENUE RECOGNITION IN CASE OF RENDERING OF SERVICES: REVENUE RECOGNITION IN CASE OF RENDERING OF SERVICES Revenue from the rendering of services can recognized based on the following two methods:- COMPLETED SERVICE CONTRACT PROPORTIONATE COMPLETION METHOD In case of rendering of services, the revenue is recognized as and when services are performed. If the services are performed over a period of more than one financial year, then performance may be viewed either under the completed services contract method or under proportionate completion method. Such performance should be regarded as being satisfied when no significant uncertainty exists regarding the amount of the consideration. Cont…: Cont … The following points are worth noting in this respects. Agency commission :-Revenue is recognized only when service is completed. Admission fee to special events :-Revenue from sale of admission tickets be recognized when the event take place. If the fees relates to number of events, it should be recognized on a systematic and rational basis. Entrance and Membership Fees:- Entrance fees to non-commercial organization is generally capitalized, but annual membership fees be recognized when received. Cont…: Cont… Financial service commission -Revenue may be recognized when the service has been completed, or if the service relates to several acts or period, then revenue be recognized on reasonable and proportionate basis. Installation fee:- If the installation fee is charged over and above the selling price, revenue is recognized only when the installation has been completed and accepted by the consumers. Advertisement agency commission:- In case of advertisement agencies, the commission should be recognized only when the related advertisement has appeared before the public and the client has intimated such appearance. REVENUE ARISING FROM USE OF RESOURCES: REVENUE ARISING FROM USE OF RESOURCES Revenue arising from the use of enterprise resources yielding interest, royalties or dividends by others should only be recognized when no uncertainty as to measurability exists. The interest may be recognized on a time proportion basis taking in to account the amount outstanding and the rate applicable. Royalties may be recognized on an accrual basis in accordance with the terms of the relevant agreement. The dividend from investments may be recognized when the owner’s right to receive payment is established. Disclosure In Financial Statements: Disclosure In Financial Statements In addition to the disclosure requirement of Accounting standard 1 on "Disclosure of Accounting Policies", an enterprise should also disclose the circumstances in which revenue recognition has been postponed pending the resolution of significant uncertainties.