presentation on accounting standard 9

PRESENTATION ON ACCOUNTING STANDARD 9

MMM (2013 - 16) GROUP 5 Presentation for Financial Accounting Topic – Accounting Standard 9

ACCOUNTING STANDARD 9

Group 5 -

Members (in order of Presentation)

Name Roll No.

Manojkumar Patil 28

Sagar Patekar 19

Kamlesh Gond 95

Kunal Sonawne 93

Aabid Mushrrif 01

Digambar Kosamkar 80

Revenue is the gross inflow of cash, receivables or other consideration arising in the course of the ordinary activities of an enterprise from the

Sale of goods Rendering of services and Use by others, of enterprise resources,

yielding interest, royalties and dividends

Recognition – Process of recording and reporting an item as an

element of financial statement

The revenue recognition principle provides that revenue is recognized:when it is earned, andwhen it is realized or realizable

Revenue is earned when the earnings process is substantially completeRevenue is realized when goods and services are exchanged for cash or claims to cashRevenue is realizable when assets received are convertible into a known amount of cash

PrinciplesPrinciples

The following terms are used in this Standard with the meanings specified:

Revenue is the gross inflow of cash, receivables or other consideration arising in the course of the ordinary activities of an enterprise4 from the sale of goods, from the rendering of services, and from the use by others of enterprise resources yielding interest, royalties and dividends.

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, receivables or other consideration.

Revenue from selling products is recognized at the date of sale (date of delivery).

Revenue from services is recognized when services are performed and are billable.

Revenue from the use of enterprise’s assets by others is recognized as time passes or as the assets are used up.

Revenue from disposal of assets (other than inventory) is recognized at the point of sale as gain or loss.

Four Types of Revenue Four Types of Revenue TransactionsTransactions

REVENUE RECOGNITION AT REVENUE RECOGNITION AT POINT OF SALEPOINT OF SALE

Before we discuss the recognition principle and accounting treatment for sales under sale or return conditions. First lets have

ourselves clear about what is meant by Sale or Return?

Under sale or return, the goods are sent by the supplier to the customer with an understanding that customer does not have to pay for such goods until these goods are used or sold by the customer and if such goods are not sold or used then customer will return such goods back to supplier. Now what constitutes the sale or use may depends upon the contract between the supplier and customer and things may get very technical. For example, customer was able to sell part of the shipment sent by the supplier and now wants to send the rest back to supplier but supplier insists that sale of whole package has occurred and the rest of the goods now belong to the buyer. This and many other situations make sale of goods very interesting complex things to solve. For the same reason we have Sales of Goods Act.Coming back to the question

Revenue from Sale of Goods

In order to understand whether we can recognize revenue in respect of such goods which have been sent under sale or return option, we have to understand the basic recognition principle or criteria given by International Accounting Standard IAS 18 Revenue.

According to IAS 18 para 14, revenue on sale of goods shall be recognized (only) when the following set of conditions is fulfilled:1.the entity has transferred to the buyer the significant risks and rewards of ownership of the goods;

2. the entity retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold;

3. the amount of revenue can be measured reliably;

4. it is probable that the economic benefits associated with the transaction will flow to the entity; and

5. the costs incurred or to be incurred in respect of the transaction can be measured reliably.


The condition relevant to our current discussion is that revenue shall be recognized when:the entity has transferred to the buyer the significant risks and rewards of ownership of the goods;


Revenues from manufacturing and selling are commonly recognized at point of saleExceptions:

1. Sales with buyback agreements2. Sales when right of return exists (high rates that are

not reliably estimable)3. Trade loading/channel stuffing

Revenue Recognition at Revenue Recognition at Point of SalePoint of Sale


Revenue recognition is deferred when collection of sales price is not reasonably assured and no reliable estimates can be made

The two methods that are used are:The installment sales method.The cost recovery method.

If cash is received prior to delivery, the method used is the deposit method

Revenue Recognition After Revenue Recognition After DeliveryDelivery


This method emphasizes income recognition in periods of collection rather than at point of sale

Title does not pass to the buyer until all cash payments have been made to the seller

Both sales and cost of sales are deferred to the periods of collection

Other expenses, selling and administrative, are not deferred

The Installment Sales The Installment Sales MethodMethod


Seller recognizes no profit until cash payments by buyer exceed seller’s cost of merchandise.

After recovering all costs, seller includes additional cash collections in income.

This method is to be used where there is no reasonable basis for estimating collectibility as in franchises and real estate.

The income statement reports the amount of gross profit recognized and the amount deferred.

The Cost Recovery MethodThe Cost Recovery Method


Seller receives cash from buyer before transfer of goods or performance

The seller has no claim against the purchaser.

There is insufficient transfer of risks to buyer to warrant recording a sale by seller

In the case of such incomplete transactions, the deposit method is used

The deposit method thus defers sale recognition until a sale has occurred for accounting purposes

The Deposit MethodThe Deposit Method


Revenue from service transactions is usually recognised as the service is performed, either by the proportionate completion method or by the completed service contract method.

(i) Proportionate completion method (ii) Completed service contract method

Revenue from Rendering of Services

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 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.


In a transaction involving the rendering of services, performance should be measured either under the completed service contract method or under the proportionate completion method, whichever relates the revenue to the work accomplished. Such performance should be regarded as being achieved when no significant uncertainty exists regarding the amount of the consideration that will be derived from rendering the service.


Installation Fees Advertising and insurance agency

commissions Financial service commissions Admission fees Tuition fees Entrance and membership fees


Revenue arising from the use by others of enterprise resources yielding interest, royalties and dividends should only be recognised when no significant uncertainty as to measurability or collectability exists. These revenues are recognised on the following bases:

(i) Interest : on a time proportion basis taking into account the amount outstanding and the rate applicable.

(ii) Royalties : on an accrual basis in accordance with the terms of the relevant agreement.

(iii) Dividends from investments in shares: when the owner’s right to receive payment is established.

Revenue from Income from Others

AS 9 DOES NOT DEAL WITH THE FOLLOWING TYPES OF REVENUE :

This Standard does not deal with the following aspects of revenue recognition to which special considerations apply:(i) Revenue arising from construction contracts;(ii) Revenue arising from hire-purchase, lease agreements (iii) Revenue arising from government grants and other similar subsidies; (iv) Revenue of insurance companies arising from insurance contracts.

Exclusions of AS 9

Examples of items not included within the definition of “revenue” for

the purpose of this Standard are:

(i) Realised gains resulting from the disposal of, and unrealised gains resulting from the holding of, non-current assets e.g. appreciation in the value of fixed assets;

(ii) Unrealised holding gains resulting from the change in value of current assets, and the natural increases in herds and agricultural and forest products;

(iii) Realised or unrealised gains resulting from changes in foreign exchange rates and adjustments arising on the translation of foreign currency financial statements;

(iv) Realised gains resulting from the discharge of an obligation at less than its carrying amount;

(v) Unrealised gains resulting from the restatement of the carrying amount of an obligation.

Exclusions of AS 9

Revenue may be recognized before delivery under certain circumstances

Long-term construction contracts are a notable exampleTwo methods available are :

The percentage-of-completion method, and

The completed contract method

Revenue Recognition Before Revenue Recognition Before DeliveryDelivery

Long-Term ConstructionAccounting Methods

1) Terms of contract must be certain, enforceable2) Certainty of performance by both parties3) Estimates of completion can be made reliably

1) To be used only when the percentage method is inapplicable [uncertain]2) For short-term contracts

Percentage-of-CompletionMethod

Completed ContractMethod

Revenue Recognition Before Revenue Recognition Before DeliveryDelivery

Costs incurred to date = Percent completeMost recent estimated total costs

11

Estimated total revenue x Percent complete = Revenue to be recognized to date

22

Total revenue to be recognized to date less Revenue recognized in PRIOR periods = Current period revenue

33

Current Period Revenue less current costs = Gross profit44

Percentage-of-Completion: Percentage-of-Completion: StepsSteps

SUMMARY OF REVENUE RECOGNITION BASES

Recognition Basis Criteria for Use Reason of Departing from Sale Basis

Percentage of Completion Method

Long term construction of property, and reliable estimates and information about the project.

Better measure of periodic income, and revenues and costs.

Completed Contract Method Use on short term contracts, when percentage of completion method is not used

Percentage of Completion Method is not applicable

Completion of Production Basis Immediate marketability at quoted prices, unit interchangeability and etc

Determinable revenues, but inability to determine the cost, thereby defer expense

Installment-sales method and cost recovery method

Absence of reasonable basis for estimating degree of collectibility and cost of collection.

Collectibility of receivable is so uncertain, gross profit is recognized until cash is received

Deposit Method Cash is received before the sales transaction completed

Not sufficient transfer of the risks and ownership

presentation on accounting standard 9

Economy & Finance