As-9 Revenue Recognition

What is Revenue? Condition - Can the revenue be recognized? Timing - When will you record revenues?Effect of uncertainty - Can you determine the amount of revenue or the costs?

1Revenue Recognition

Revenue

Consideration:Flow of economic

benefitsInflows resulting in an

increase in equity (other than increases through contributions from equity holders)

Ordinary Activities: Activities undertaken as

part of business Related activities

engaged in -furtherance of -incidental to -arising from these

activities


Revenue does not includeRevenue does not include REALISED GAINS FROM

Disposal of non – current assets Discharge of an obligation at less than its carrying amount

REALISED OR UNREALISED GAINS FROM

Changes in foreign exchange rates and adjustment arising on the transactions of foreign currency financial statements (AS – 11)


• Revenue arising from construction contracts

• Revenue arising from hire-purchase, lease

agreements

• Revenue arising from government grants and

other similar subsidies

• Revenue of insurance companies arising from

insurance contracts


• Property in goods transferred to buyer for a price

• All significant risks and rewards of Performance ownership transferred to buyer & seller retains no effective control over the goods • No significant uncertainty as regards consideration Uncertainty


Delivery is delayed at buyer’s request


Chikki sold Trousers to Mr.Ahoo on 21 March

09, however Mr.Ahoo requested the Trousers

to be delivered to them in April 09. Mr.Ahoo

accepted the sales bill and confirmed that the

Trousers will be held at Ahoo’s risk till

delivery, Chikki would like to know whether to

record sale for year 2008 - 2009 or 2009 –

2010 ???

Example


Answer :

Sale to be recorded for year on 21

March 2009 as delivery is delayed

on buyer’s request and buyer has

taken title and accepted billing.


• Installation & Inspection• Sales on approval• Guaranteed Sales• Consignment Sales • Subscription for Publication• Installment Sales• Warranty Sales• Special Order & Shipments


Installation and InspectionInstallation and InspectionM/s Larsen & Toubro Ltd. sold electric panels to M/s

Vizag Steel Plant on 27 March 2009.However,

M/s Vizag Steel Plant accepted the workstations

subject to installation and inspection. The

inspection and installation would be completed

on 2 April 2009.,M/s Larsen & Toubro Ltd. would

like to know whether to record sale for year

2008 - 2009 or 2009 - 2010.


Answer :

Sale to be recorded for year on 02

April 2009 as delivery is delayed

due to installation.


Sales on Approval

M/s ABC Ltd. sold goods to XYZ, who have

accepted on subject to approval basis. M/s

ABC Ltd. has asked XYZ whether they will

accept the goods or not by 29 March 2009.

XYZ approves acceptance on 25 march 2009.


Answer :

Sale recorded on 25 March 2009 as delivery

is subject to conditions on approval.


Guaranteed Sales

Philips has sold 150 Televisions with 2 years

guarantee in Jan 2009. By past records only 2%

of Televisions sold are sent back by dissatisfied

customers. When should the sales income be

recorded?


Answer: 98% of the sales income should be recorded

in the sales A/c and 2% should be recorded in the “provision for guaranteed sales return A/c”, which is then transferable to sales A/c after the guarantee period is over as delivery is subject to conditions guaranteed sales


Consignment sales

Dr.Mittal has an agency for Coca-cola

products. Coca-cola sends 200 Bottles to

Dr.Mittal’s showroom on consignment basis on

1st March 2009. But till 31st March 2009 none

of the bottles have been sold to any customer.

Should Coca-cola record the products sent as

sales?


Answer: The Coca-cola bottles sent on consignment

basis should not be recorded as sales in the year 08-09 as revenue is recognised only when consignee reports sale to third parties.


Subscriptions for publications

Tata is the publisher of a journal by McGraw Hill.

McGraw-Hill received Rs.50,000 as subscription

under a special scheme for next five years. McGraw

Hill would like to know whether the entire income

should be recorded for the current year or not.


Answer : Rs. 50,000 spread out over the five

years and hence Rs.10,000 per year as Income for next five years.


Series of Instalment PaymentsChikki buys a car for Deva for Rs.15 lakhs

in Feb 2009. However he pays the amount

in 3 installments to the owner by July

2009. When should the owner record the

income?


Answer:

The income should be recorded in the year

2009-10 as when the purchaser makes a

series of instalment payments to the seller,

and the seller delivers the goods only when

the final payment is received.


Criteria for Revenue Recognition: Services


• Installation fees

•Advertising & Insurance Agency

Commission

• Financial Service Commission

• Admission Fee

• Tuition Fee

• Entrance & Membership Fee


Example‘Lousy Wonders’ obtained advertisement rights for

the Champion’s Trophy to be held in Oct/Nov 2009

for Rs.10 crores. By 31st March 09, they processed

advertisement for Rs.15 crores. The advertiser

paid the full amount.

25% of the advertisement time is expected to be

available in June 2009 and balance 75% in July

2009. Calculate the profit/loss for the month of

June, July 2009.

AnswerAs the 25% of the advertisement appeared in

June 2009 and 75% in July 2009, therefore the

revenue of Rs.5 crores should be apportioned

in 25% and 75% ratio, which will be Rs. 1.25

crores in June 2009 and Rs. 3.75 crores in July

2009.

• Interest -Time proportion basis, taking into account: -- Amount Outstanding -- Rate Applicable• Royalties- Accrual basis, in accordance with terms of agreement• Dividends - When owner’s right to receive payment is established


Interest and Royalties

PCOM Ltd. used certain resources of SIMSR Ltd. In

return SIMSR Ltd. received 750 and 1000 Rs. as

interest and royalties respectively from PCOM Ltd.

during the year 08-09. When and on what basis

should the revenue be recognized by SIMSR Ltd.

given that the resources were used during the year

07 - 08 ?


Answer : The revenue should have been recognised in

the books of last year i.e. 2007-08.since interest is recognised on time proportion basis and royalties are recognised on accrual basis.


Dividends Mr. Tapan, a billionaire has invested in securities and mutual funds of Reliance. The company proposed a dividend on 10th March 09. but the dividend was declared on 15th June 09.When should be the income recognised in the books of Tapan?


Answer : The dividend income should be recognised by

Tapan during the year 2009 – 2010 since dividends are recognised only when the owner’s right to receive payment is established.


• Measurability: - Consideration should be reasonably determinable - If not determinable - then postpone• Collectability: - Ability to assess ultimate collection - With reasonable certainty at time of collection - But not if uncertainty arises after sale• Disclosure: - Of circumstances under which revenue recognition is postponed 32Revenue Recognition

Frauds

Recording Revenue Too Soon

- Recording revenue when services remain to be

provided

- Recording revenue before customer’s

unconditional acceptance

- Recording revenue when the customer is not

obliged to pay

Revenue Recognition 33

Frauds(Cont…)

Recording Questionable or Inflated Revenue

- Grossing-up Revenue

- Sales to strategic partner is recorded as

revenue

- Other intermediates in business should only

show their fees as revenue, and not the total

amount paid by the final buyer


Frauds(Cont…) Recording Bogus Revenue

- Sales lacking economic value

- Being alert for side agreements

- Recording revenue of Supplier rebates tied to the

future

- Recording cash received in lending transaction

income as revenue

Revenue Recognition 35

Key Issues

Risk factors which Influence Improper Revenue RecognitionManagement characteristics and influence over the control environment Industry conditionsOperating characteristics and financial stabilityLack of Internal Controls/Audit

Indicators of PotentialAccounting

MisstatementsAbsence of an

agreementLack of deliveryIncomplete earnings

process misstatements


Thank YouQ & A’s


As-9 Revenue Recognition

Documents

Transcript of As-9 Revenue Recognition