revenue recognition- be4 xam

7/29/2019 Revenue Recognition- Be4 Xam

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Ramkesh.Christ @

REVENUE RECOGNITION AS-9

Top lines do matter

Prof. Ramkesh Gupta


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WHAT IS REVENUE ?

THE NEW DRESSINGCODEPROFITS DO NOT MATTER BUT TOP

LINES (REVENUES DO)

For companies Absolute Sales Growth

Matter

The DOTCOMS example

Sales of a travel agent - Should sales

includes the cost of the fare collected or

only the commission


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AS 9

WHAT IS REVENUE ?

Revenue is gross inflow of cash, receivables or

other considerations in the ordinary course ofbusiness from sale of goods, rendering of service

FASB Concept statement 6 Defines Revenue

Inflows or other enhancements of assets of an

entity or settlement of liabilities form delivering or

producing goods, rendering services or other

activities that re entities major or central operation


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REVENUE RECOGNITION

ABC LTd. signed a contract on December 15,

2005 to supply special equipment to BPL LTd.

The sale value of the equipment was Rs.2 lacs.

The production was completed on 28 Feb 06, and

ready for despatch. The goods were despatched

to the BPL 18th Mar and the same were received

by the company on 1st April. The company

received full payment on 30th Apr, 2006 There

was a warranty clause of 6 months from the dateof receipt. What is the Revenue for the y.e.

31.03.06?

Dec05 Jan 06 Feb.06 Mar.06 April 06


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The Revenue Recognition problem ?

Dec. Jan. Feb Mar Apr Sep


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Revenue Recognition

One option might be to record the revenue in the month

the production is complete.

Jan FEB


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Revenue Recognition

Another option might be to record the revenue when

goods are received by customer or finally when cash is

received in April

Dec Jan Feb Mar Apr

Another option might be to record the revenue when

goods are received by customer or finally when cash is

received in April


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The Revenue Recognition

A third option might be to record the revenue when

goods are despatched ( March) or Still, when the

warranty period is over.

Dec Jan Feb Mar April 6 m later


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Ramkesh.Christ @

Revenue Recognition

Conceptually revenue can be recognized

incrementally and continuously at different

points in the earning process

For accounting purpose we choose one

event which will reduce the risk of

ultimately receiving the revenue tominimum


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REVENUE RECOGNITION AS 9

REVENUE IS RECOGNISED FROM SALES

WHEN

All significant risks and rewards of ownership

have been transferred to the buyer (Ref: Sale ofGoods Act)

The seller has not retained any control over the

goods transferred

There is no uncertainty about the amount of

consideration from the sale


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Broad frame work for recognition

Different points in RR

Sale is complete on Delivery *

Subject to certain conditions eg: allowing

customer to test the product, additional

services, other works before accepting the

product

Sale complete only when cash is received


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Eg:ABC makes equipment and installs them in thefactory on firm orders from parties. The

installation time is about an hour.At the year end ABC produces 10 equipments and

ships it to the customer and promises to to install

the same as soon as some cables were available.

Can the company recognize the sale on delivery ?

Ans: No


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Two criterion must be followed:

Is it realized or realizable

Is it earned through substantial completion of theactivities involved in completion

The best practice is to select one point in the cycle

that meets both the criteria for recognition.


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Principle of Conservatism

Principle of Substance over Form

Principle of Accrual


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REVENUE RECOGNITION

Revenue is recognized at the point of Sale

It has to satisfy the three conditions:

Risks and Rewards are transferred to the

buyer Seller has no control over the goods

There is no uncertainty over the collectibles

Substantial Performance of the contract


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Ramkesh.Christ @

Recognition Criteria

A Renttoown stores in the US, sellsConsumer durables on a installment basis .

Ie. Pay rent and own after yearsTheir experience is only 25 % of thecustomers complete the full term of theagreement.

They recognize revenue as and when cash iscollected.


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Ramkesh.Christ @

REVENUE RECOGNITION :

The number Game

RELIANCE INDUSTRIES

SALES CROSS 50000 cr

!!


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Ramkesh.Christ @

Reliance Industries

The real sales: year ended 31/3/2002

Sales Rs. 57,119 cr

Inter Divisional Transfers Rs. 11,715Excise Duty Rs. 3,314

=========

Rs 42088 cr

International accounting standards/US GAAP, do notallow the inclusion of inter divisional transfers,Excise duties etc.

ICAI, has now come out with this clarification


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Ramkesh.Christ @

WHAT IS REVENUE ?

THE NEW DRESSINGCODEFor a company to include Gross Amount as sales

It must be the primary obligor.

It must have general inventory risk.

It must have latitude in establishing prices

Changes the product or performs part of theservice.Determines product/service specifications.

Bears risk for physical loss of inventory.

(eg: A travel agent cannot do all this)


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Ramkesh.Christ @

Recognition Policies followed by

companiesMicrosoft: Not all revenues are recognised

at the time of sale. 20 % of the sale price is

reported as unearned revenue (office )and(35% for windows). This is recognised over

a 18 month period which is the product life

cycle.- Perceived by SEC as the income smoothing

technique used by MS.


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Revenue Recognition

How to recognize revenue ?

For services

Long Contracts


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Rendering of Services

Revenue is normally recognized by

Completed contract Method or

Percentage of completion method

The Question is is there really a choice ?


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Revenue Recognition:

Construction Contracts AS - 7Usually take long time to complete

Ex: Construction of Roads, Bridges, dams, buildings.

Two methods for recognizing revenues in suchcases

Percentage of Completion Method

Completed Contract method (eliminated)


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Revenue Recognition: Contracts

Percentage Completion Method

Based on Completion of the Stage (Mile

stone event)Stage can be determined by,

-Cost incurred / Total cost

-Survey of work performed-Completion of physical proportion of thecontract work


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Revenue Recognition:

Construction ContractsPercentage Completion Method

Steps 1: Determine the stage of completion

Step 2: Estimate the total revenue

Step 3:Estimate the total contract cost

(Completed and balance)

Step 4: Take proportionate Profits or

Account for the losses


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Yr 1 Yr 2 YR 3

Contract Price 800 880 880Cum. Actual

Cost210 450 750

Estimate cost

to Complete490 300 -

Total Cost 700 750 750

% completed 30 % 60% 100%

Rev (Cu, CY 240 , 240 528, 288 880, 352

Cost(CU, CY 210, 210 450, 240 750, 300

Profit(CU,CY 30, 30 48 52


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RR: Construction Contracts

Completed Contract Method:

Revenue and costs are recognised only

when the entire contract is completed

This method is not recognised as per the

Accounting Standards


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Thats all

revenue recognition- be4 xam

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