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PHARMACEUTICL INDUSTRY

Types of revenue & revenue recognition

2© Grant Thornton India LLP. All rights reserved.

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Documentation

Section Content

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Introduction

AS - 9

Types of revenue

Points to be focused in audit

Revenue Recognition

Section 1

Introduction:

Introduction

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• One of the biggest businesses in the world

• Spending on prescription drugs globally- $800 Billion

in 2011

• $300 Billion market was grabbed by USA in 2011

• America's spending in drugs increased by 2.3% in

2011

• Market of drug spending to jump 28% in 2015

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Introduction

INDIA

• World's 3rd largest industry by volume and

14th in terms of value.

• Total market is $12 Billion

• $3.1 Billion growth compared to 2009-10

• Estimated to reach on growth of $15.4 Billion

by 2015

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Section 2

AS - 9: Revenue Recognition(Summary)

REVENUE

Gross Inflow of cash, Receivable

or other consideration arising in

the course of ordinary activities:

Sale Of Goods Rendering Of ServicesUse of enterprise

Resources by others

Transfer of Property

In goods

Significant Risks

and Rewards are

transferred

• Proportionate

Completion

of services Method

• Completed Service

Contract Method

• Interest

• Royalties

• Dividends

Common for all three groups

a) Measurability of amount, b) Certainty of collection c) Disclosure of

circumstances when revenue recognition is postponed

Definitions of certain expressions in the previous slide

Ordinary ActivitiesSignificant Risks & Rewards of

ownership

Activities undertaken as part of

business &

Related activities engaged in

• furtherance of

• incidental to

• arising from

these activities.

Ownership in goods

The major risks & rewards associated

with the goods must be transferred.

Ex: When delivery is made,

When delivery is delayed at

buyers request (How ever,

the item must be on hand,

identified and ready for

delivery)Property in goods

Revenue recognition when delivery of goods sold subject to conditions:

a. Sale on Approval:

When buyer confirms his desire to buy goods.

b. Consignment Sales:

When the goods are sold by consignee to a third party.

c. Cash on delivery sales:

When cash is received by the seller or his agent.

d. Special order and shipments:

When the goods are manufactured, identified and ready for delivery to the

buyer by the third party.

Recognition of Revenue -

Rendering of Services

Completed Service Method

Recognize Revenue when the sole or final act takes place and the service becomes

chargeable.

Proportionate Completion Method

Recognize Revenue by reference to performance

of each act – on the basis of contract value / associated cost /No of

acts

Recognition of Revenue-Others

• Interest:

Time proportion basis, taking into account:

o Amount Outstanding, &

o Rate Applicable

• Royalties:

Accrual basis, in accordance with terms of agreement

• Dividends:

When owner’s right to receive payment is established

Section 3: Types of revenue mainly involved

1. Sale of product

2. Sale of Services

3. Export Incentives

4. Technology/know-how/fees

5. Unbilled revenue

SALE OF PRODUCTS

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• Revenue from sale of products is recognized on

the basis of actual dispatches.

• Transfer of significant risk and reward of

ownership to buyer

• Reasonable to expect that the ultimate collection

will be made.

SALE OF SERVICES

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• On completion of services

• Recognized on the basis of contract with

customer,

• and, agreed milestones are achieved.

EXPORT INCENTIVES

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• Revenue from export incentives is recognized

on the basis of actual dispatches

• Recognized on the basis of Bill of lading/Airway

Bill.

• when there is no uncertainty regarding the

ultimate collection of export proceeds

• Right to receive is established

Technology/ Know-how/ Fees

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• As and when the right to receive such income is

established

• or, Accrual basis

• When performance obligation is completed

• Risk and reward of ownership is transferred to

customer.

UNBILLED REVENUE

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• Recognized to the extent that is probable that

the economic benefits will flow to the company

• Revenue can be reliably measured.

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Section 4:

Revenue Recognition

REVENUE RECOGNITION

CALCULATION

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Percentage Completion method

• % of work completion to be calculated as below-

Actual Hours

Estimated Hours

• Material will be taken as 100% of TOTAL MATERIAL ISSUED.

• Machining Charges will be taken on % Completion of Estimated

machining charges

• Profit will be taken as per policy. viz. Cost plus, % on sales, etc.

REVENUE RECOGNITION

CALCULATION

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• To be shown in Balance sheet under Current Assets as UNBILLED

WIP. i.e. only machining and material cost only.

• No profit element in unbilled WIP.

DOCUMENTATION

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DOCUMENTS TO BE MAINTAINED IN CASE OF DOMESTIC & EXPORT

SALES

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Documents for both indigenous and export sales are:

• Customer PO

• Sales order on the basis of customer PO

• Certificate of Analysis

• Quality review report

• Packing list

• Delivery Challan/Note

• Excise invoice

Additional documents for export sales are:

• Manufacturer’s certificate

• Certificate of shipment

• Shipping order

• Cart/Lorry Tickets

• Shut out advice

• Shipping advice

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