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ACCOUNTING STANDARD-9 REVENUE RECOGNITION
It does not deal with Revenue from: • Hire-purchase/ Lease agreements • Government Grants etc. • Construction Contracts • Insurance Contracts
REVENUE RECOGNITIONStandard… what it contains • Identifies the point of time when the revenue is to be recognized and booked as income in financial statements. • Lays down additional restrictive conditions in respect of recognition of revenue.
What is revenue? Gross inflow from ordinary activities: Sale of goods Rendering Services Providing resources (interest/ royalties/ dividends) For agency work, revenue is only commission and not gross inflow.
According to the US GAAP Revenue is defined as actual or expected inflow of cash or other assets or reduction in liabilities resulting from producing, delivering or providing goods or services constituting an entity’s major or central operations.
Para 11. Sale of goods is regarded as achieved when 1.(a) Transferred property for a price (b) All significant risk and rewards of ownership is transferred to buyer (c) Seller retains no effective control of goods (d) Buyer gets ownership and effective control of goods. 2. (a) No significant uncertainty for realization of the consideration.
Sale of goods 1. Delivery is delayed at buyer’s request and buyer takes title and accepts billing. 2. Delivery subject to conditions: • Installation and inspection • On approval • Guaranteed sales • Consignment sales • Cash on delivery sales 3. Sale/ repurchase agreements i.e. where sellers concurrently agrees to repurchase. 4. Sales to intermediate parties on consignment.
Export Sales 1. Recognition on FOB value. 2. At the point of let export • Delivery to shipping company
Disclosure of Sales Revenue Sales revenue is to be disclosed on the face of Statement of Profit and Loss. Turnover (Gross) XX Less: Excise duty XX Turnover (Net) XX *Here, Excise duty represents recovered from customers.
RENDERING SERVICES (Para 7 and 12)
Recognition • Either Completed Service Method, • Or Proportionate Completion Method Depending upon: • Requires single step • Requires multiple step * Consider significance of last step.
Use of resources by others • INTEREST On time proportion basis • ROYALTY On Accrual basis & as per agreement • DIVIDEND On establishment of Right to Receive the payment
DISCLOSURE • Disclosure of Accounting Policies (AS-1) • Disclosure of Non Recognition of Revenue pending resolution of significant uncertainties.
BALLOONING • interest payments are ballooned. Lower rates in initial years of loan whereas higher rates in later years. (EAC Opinion Query 46 Volume 21)
INTEREST ON OVERDUE OUTSTANDINGS For accounting interest on overdue outstanding can be used. • Whether on accrual basis OR • Whether blanket cash basis • Same way if payment is not made within stipulated period attracts additional interest of 1%. What should be the accounting?
FOREIGN EXCHANGE GAIN ON DOUBTFUL DEBTORS • Uncertainty: AS-11 Vs. AS-9 ?
TAS(RR) Changes from Accounting Standard – 9 • AS-9 recognizes both the “Proportionate Completion Method” or Completed Service Contract Method”. TAS(RR) provides “Percentage Completion Method for service transactions. No Alternatives in TAS. • AS-9 provides postponement of recognition of revenue in relation to any claim where the ultimate collection with reasonable certainty is lacking. In TAS in view of the specific provisions in The Act for Bad Debts the postponement of revenue due to uncertainty is restricted to claim for price escalation and export incentives. • Recognition for income from dividend not incorporated in TAS(RR).
A. Sale of Goods • A Ltd. Is Extracting gypsum from its mines and dumping it across railway sidings in the form of heaps. • The company receives an advance of Rs. 1,00,000 on 25.03.10 from B Ltd. For supplying certain amount of gypsum. • A challan and invoice was prepared for specified quantity on 30.03.10 • The material was loaded from heap to the railway wagon on 15.04.10. When revenue is to be recognized?
2. Sales involving “guarantees” or offering “money back if not completely satisfied” • Mr. A sold a steam iron to Mr. B for Rs. 500/- • The sale involves guarantee for 2 years plus an unconditional right to buyer to return back the iron within 3 months of sale if not satisfied. When revenue is to be recognized?
B. Rendering of Services Servicing fees included in the price of a product • Mr. A sold a TV to Mr. B for Rs. 20000/- • The prices of TV includes an unidentifiable amount of Rs. 3000/- for subsequent servicing during a warranty period of 3 years. When revenue is to be recognized?
C. Others Dividend • Mr. A invested Rs. 10000/- in 1000 shares of Rs. 10 each of XY Ltd. Through secondary market • The company declared a dividend @ Rs. 50% in its AGM dated 25.03.2011. • Mr. A received dividend warrant on 01.05.2011. In which financial year dividend income is to be recognized?
3. Financial Service Commissions: • Single Act OR Single Amount OR Stage over period of service OR life of transaction. • Recognition have regard to- • Services are ‘Once and for all’ OR ‘Continuing Basis’. • Incidence of the cost relating to the service. • When the payment will be received. EXAMPLE • Commission charged for loan arrangement recognized when binding obligation entered into. • Commitments, Facilities, Management Fee relating to continuing obligation is recognized on timing basis.