Revenue recognition

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how to recognize revenue

Transcript of Revenue recognition

  • 1. Measurement of Revenue

2. Issues covered Deciding the timing of revenue Measuring the amount of revenue in aparticular period Measuring expenses related to revenuerecognized in a particular period. 3. Deciding the timing of revenueOperating cycle of a product: Purchase order by customer 2008 Production of units 2009 Delivery of units to customers 2010 andcollection of cash 2010 Post sale free service period 2011Revenue is recognized in _________ year 4. Deciding the timing of revenueOperating cycle of product: Purchase order by customer 2007 Advance collection from customers 2008 Production of units 2009 Delivery of units to customers 2010 Post sale free service period 2011 Revenue is recognized in _________ year 5. First Requirement for RevenueRecognition Transfer of goods along with ownership,title and significant risk in case of sale ofgoods 6. Deciding the timing of revenueOperating cycle of product: Purchase order by customer 2008 Production of units 2009 Sale of units to customers on credit 2010 Collection from customers in 2011 Post sale free service period 2011 and 2012Revenue is recognized in _________ year 7. Second Requirement for RevenueRecognition In case of credit sales, the credit salesamount should be realizable orcollectable. The risk of collection shouldbe insignificant. 8. Summary Two requirements for revenue recognition: Shipment of goods in case of sale of goods orcompletion of service in case of serviceAND Insignificant risk of realization or collection 9. Revenue from services rendered ABC Ltd entered into a contract with one of itsclients in 2010 to provide software servicesduring 2011 to 2015.Contract price was Rs 7.50Cr Completed Service Contract MethodOr Proportionate Completion Method Price is pre-determined Cost of entire service can be reliably measured 10. Measuring Expenses in case of sale of goodsOperating cycle of product: Received order in 2008 Production of units 2009 Sale of units to customers on credit 2010 Collection from customers in 2011 Post sale free service period 2011 and 2012 Inventory used for credit sales (COGS) in 2010 Estimated bad debts (Provision for bad debts)related to credit sales of 2010. Estimated cost of (Provision) post sale freeservice related to credit sales in 2010 11. Measuring Expenses in case ofservices rendered ABC Ltd entered into a contract with one of itsclients in 2010 to provide software servicesduring 2011 to 2015.Contract price was Rs 7.50Cr. The estimated cost is Rs 1 Crore in eachyear. Completed Service Contract MethodOr Proportionate Completion Method Price is pre-determined Cost of entire service can be reliably measured 12. Case 1 - Other revenue Interest Income: total amount of interestearned till reporting date Royalties Income: total amount of royaltiescharged till reporting date Dividend Income: Amount of dividenddeclared by company till reporting date 13. Case 2 In Dec 2011, Manufacturer A sold goods toWholesaler B. B used this inventory as collateralfor a bank loan of Rs 10,00,000 and sent the Rs10,00,000 to A. Manufacturer A agreed torepurchase the goods on or before 1 st July, 2012for Rs 12,00,000. Does Manufacturer A have revenue in 2011?Why? Product Repurchase Agreement. 14. Case 3: Manufacturer A found that Afghanistan is apotential market for his product. In 2011,A madecredit sales to a customer from Afghanistan oncredit basis for Rs 30 Cr. The amount is yet to becollected on accounting closing date. Thecustomer financial condition is strong and he hasstrong willingness to make payment. In 2011, ithas been observed that Central Bank ofAfghanistan rejected 60% of requests for INR bylocal importers. Does manufacturer A have revenue in 2011?Why? 15. Case 4 In December 2011, Manufacturer A soldgoods to B on cash basis for Rs 4 Cr. Thedelivery is delayed at the buyers requestand buyer takes title and accepts billing.The goods will be delivered in 2012. Does manufacturer A have revenue in2011? Why? 16. Case 5: In Oct 2011, Manufacturer A sold goods to B on cashbasis for Rs 5 Cr. As per the Terms and Conditions ofsales contract guarantee period is 6 months. During thisperiod, B will have the right to return the goods to A andask for cash. Does manufacturer A have revenue in 2011? Why? Goods sent on sale-or-return basis Sales including installation and inspection Consignment sales 17. Case 6: In 2011, Manufacturer A sold goods to Bon installment basis for Rs 5 Cr. B willmake down payment of Rs 1 Cr andbalance will be paid in four equal annualinstallments. A will release the goods to Bonly after payment of all the installments. Does manufacturer A have revenue in2011? 18. Case 7 When an electric utility customer useselectricity, the electric company hasearned revenues. It is obviouslyimpossible, however, for the company toread all of its customers meters on theevening of 31 March 2012. How does the electric company know itsrevenue for financial year 2011-12? 19. Case 8 A bank sells a customer $500 of AmericanExpress travelers checks, for which thebank collects from the customer $505.(The bank charges a 1 per cent fee for thisservice). How does the bank record thistransaction? 20. Case 9 Sales on barter system Sales within the group companies etc. 21. Accounting for Bad Debts Provision for Bad Debts (liability) Bad Debts (expense) Collection of debtors written off as baddebts (income) 22. Accounting for revenue and expense atMicrosoft Corporation 1990s In case of listed companies, the general accountingpractice of manipulation is overstating the revenues andunderstating the expenses. Microsoft Corp continuously understated its revenue andoverstated expenses. No separate accounting standard for IT sector in 1990s Entire industry was expected to follow the accountingpolicies of Microsoft Corp What was the Financial Reporting Strategy of MicrosoftCorp? 23. Summary The biggest individual item The critical part in accounting is revenue No accounting standard covers different issuesof revenue recognition The Revenue Recognition is the most popularscheme accounting manipulation The users of financial statements should beextremely careful with respect to RevenueRecognition The users of financial statements should beextremely careful with respect to WIP in case ofconstruction companies. 24. Readings1.Chapter 3 from the prescribed text book2. Accounting Standard 9http://www.icai.org/post.html?post_id=8660