revenue recognition_2014-15.pptx
TRANSCRIPT
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Measurement of Revenue
Dr.Rachappa Shette
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Issues covered
Deciding the timing of revenue
Measuring the amount of revenue in aparticular period
Measuring expenses related to revenuerecognized in a particular period.
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Deciding the timing of revenue
Operating cycle of a product:
Purchase order by customer 2008
Production of units 2009
Delivery of units to customers 2010 andcollection of cash 2010
Known post sale free service period 2011
Revenue is recognized in _________ year
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Deciding the timing of revenue
Operating cycle of product:
Purchase order by customer 2007
Advance collection from customers 2008
Production of units 2009
Delivery of units to customers 2010
Known post sale free service period 2011
Revenue is recognized in _________ year
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First Requirement for RevenueRecognition
Transfer of goods along with ownership,title and significant risk in case of sale ofgoods
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Deciding the timing of revenue
Operating 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
Known post sale free service period 2012
Revenue is recognized in _________ year
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Second Requirement for RevenueRecognition
In case of credit sales, the credit salesamount should be realizable or collectable.The risk of collection should be
insignificant.
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Deciding the timing of revenue
Operating 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
Unknown post sale free service period 2012
Revenue is recognized in _________ year
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Summary
Two requirements for revenue recognition:
Shipment of goods in case of sale of goods orcompletion of service in case of service
AND
Insignificant risk of realization or collection
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Revenue in case of ContructionIndustry
ABC Ltd entered into a contract with one of itsclients in 2010 to provide software servicesduring 2011 to 2015.Contract price was Rs 7.50
Cr Completed Service Contract Method
Or
Proportionate Completion Method Price is pre-determined
Cost of entire service can be reliably measured
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Measuring Expenses in case ofsale of goods
Operating cycle of product: Received order in 2008 Production of units 2009 Sale of units to customers on credit 2010
Collection from customers in 2011 Known post sale free service period 2011 and 2012In which year revenue recognised?What are the expenses incurred for the year 2010?
COGS i.e. Inventory is used for credit sales in2010
Estimated bad debts (Provision for bad debts)related to credit sales of 2010.
Estimated cost of (Provision) post sale free
service related to credit sales in 2010
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Measuring Expenses in case ofConstruction Industry
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 Method
Or
Proportionate Completion Method Price is pre-determined
Cost of entire service can be reliably measured
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Case 2:
Manufacturer A found that Afghanistan is apotential market for his product. In 2011,Amadecredit sales to a customer from Afghanistan oncredit basis for Rs 30 Cr. The amount is yet to be
collected on accounting closing date. Thecustomer financial condition is strong and he hasstrong willingness to make payment. In 2011, ithas been observed that Central Bank of
Afghanistan rejected 60% of requests for INR bylocal importers.
Does manufacturer A have revenue in 2011?Why?
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Case 3
In December 2011, Manufacturer A soldgoods to B on cash basis for Rs 4 Cr. Thedelivery is delayed at the buyers request
and buyer takes title and accepts billing.The goods will be delivered in 2012.
Does manufacturer A have revenue in
2011? Why?
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Case 5:
In 2011, Manufacturer A sold goods to Bon installment basis for Rs 5 Cr. B willmake down payment of Rs 1 Cr and
balance 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?
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Case 6
When an electric utility customer useselectricity, the electric company hasearned revenues. It is obviously
impossible, however, for the company toread all of its customers meters on the
evening of 31 March 2012.
How does the electric company know itsrevenue for financial year 2011-12?
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Case 7
A bank sells a customer $500 of AmericanExpress travelers checks, for which the
bank collects from the customer $505.
(The bank charges a 1 per cent fee for thisservice).
How does the bank record this
transaction?
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Case 8
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 Rs
10,00,000 to A. Manufacturer A agreed torepurchase the goods on or before 1stJuly, 2012for Rs 12,00,000.
Does Manufacturer A have revenue in 2011?
Why?
Product Repurchase Agreement.
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Case 9
Sales on barter system
Sales within the group companies etc.
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Accounting for revenue and expense atMicrosoft Corporation1990s
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?
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Summary
The biggest individual item
The critical part in accounting is revenue
No accounting standard covers different issues
of revenue recognition The Revenue Recognition is the most popular
scheme accounting manipulation
The users of financial statements should be
extremely careful with respect to RevenueRecognition
The users of financial statements should beextremely careful with respect to WIP in case of
construction companies.
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Readings
1.Chapter 5 from the prescribed text book
2. Accounting Standard 9http://www.icai.org/post.html?post_id=8660
3. Revenue Recognition and Reporting
(HBS)