AS 9 - REVENUE rECOGNITION

1
AS 9 - REVENUE rECOGNITION

• Presented by
• CA Sandip Chandarana

2
OBJECTIVES

• Recognition of revenue in the statement of profit
  and loss account arising in the ordinary course
  of business i.e. from
• The Sale of Goods
• The Rendering of Services and
• The use by Others of enterprise resources
  yielding interest, royalties and dividends.

3
APPLICABILITY

• This standard does not apply to
• Revenue arising from Construction Contracts.
• Revenue arising from Hire Purchase or Lease
  Agreements.
• Revenue arising from Government Grants or Other
  Similar subsidies.
• Revenue of Insurance Companies arising from
  insurance business.

4
DEFINITIONS

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

5
DEFINITIONS

• COMPLETED SERVICE CONTRACT
• 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
• 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.

6
A. SALE OF GOODS

• The seller has transferred the property in the
  goods to the buyer for a consideration.
• The transfer of property in goods in most cases
  results in or coincides with the transfer of
  significant risk and reward of ownership to the
  buyer.
• There may be the case where transfer of property
  in goods does not coincide, the transfer of
  significant risk and rewards of ownership.
• The time for recognising the revenue in both the
  point no. 2 and 3 above, is only when the risks
  and reward of ownership is transferred to the
  buyer.

7
When to recognise the revenue in following cases?

• Sales against advance payment received.
• When full or partial payment is received for the
  goods not presently held in stock i.e. stock is
  still to be manufactured or is to be received
  directly by the customer from a third party.
  Revenue from such sales should not be recognised
  until goods are manufactured, identified and
  ready for delivery to the buyer by the third
  party.

8
When to recognise the revenue in following cases?

• Delivery delayed at buyers request but buyer
  accepts title/billing.
• The seller should recognise the revenue even if
  goods are not dispatched provided the goods are
  ready, buyer takes title and accepts billing and
  the seller holds the goods in his premises on
  behalf of buyer i.e. revenue is recognised when
  risk and reward of ownership are transferred.

9
When to recognise the revenue in following cases?

• Barter transactions
• As per IAS 18 Revenue When goods or
  services are exchanged or swapped for goods or
  services which are of a similar nature and value,
  the exchange is not recorded as transaction which
  generates revenue but when goods are sold or
  services are rendered in exchange for dissimilar
  goods or services, the exchange is regarded as
  transaction which generates revenue and the
  revenue is measured at the fair value of goods or
  services received, adjusted by the amount of any
  cash or cash equivalent transferred. When the
  fair

10
When to recognise the revenue in following cases?

• value of goods or services received can not be
  measured reliably, the revenue is measured at the
  fair value of the goods or services given up,
  adjusted by the amount of any cash or cash
  equivalent transferred.
• Example
• A hotel commissioned a consultant to conduct a
  supply chain study. Instead of paying the fees in
  cash to the consultant, it was agreed that the
  fees would be paid by granting the consultant or
  his

11
When to recognise the revenue in following cases?

• designate 1000 days free stay in any of its
  chain in India. The consultant agreed because in
  a normal year his firm require at least 1500 days
  stay in a hotel. How should the hotel account for
  this swap, assuming that hotel charges an average
  of Rs. 5000 per day and believes that it is a
  fair consideration for the service of the
  consultant?
• Explanation In the above case, the goods or
  services exchanged are of a dissimilar nature and
  value hence the above case is identified as
  transactions and revenue from such transactions
  needs to be accounted.

12
When to recognise the revenue in following cases?

• In the above case, the fair value of the
  transaction shall be calculated as given below
  from the hotel point of view
• Fair Value Rs. 500,000 i.e. Rs. 5,000 per day
  x 1000 free days)
• Also the corresponding consultation cost Rs. 50
  lakhs shall be accounted by the hotel.

13
When to recognise the revenue in following cases?

• Delivery subject to conditions
• Installation and inspection
• Normally revenue should not be recognised until
  the customer accepts the delivery of the goods
  and installation inspection are complete.
  However, in some cases the installation process
  are simple, in such cases it is appropriate to
  recognise the revenue even if installation is not
  complete. E.g. Installation of Television or
  Refrigerator.

14
When to recognise the revenue in following cases?

• Approval
• Revenue should not be recognised until the goods
  have been formally approved and accepted by the
  buyer or the buyer has done the act adopting the
  transactions or the time period for rejection has
  elapsed or where no such time is fixed, a
  reasonable time has elapsed.
• Guaranteed Sales i.e. delivery is made giving the
  buyer unlimited right of return.
• Recognition of revenue in this case depends on
  the substance of transactions/agreement. E.g. in
  case of retail sales offering a guarantee of
  Money back if not completely satisfied, it may
  be appropriate to recognise the sale but suitable
  provision for returns based on the past
  experience is made.

15
When to recognise the revenue in following cases?

• Consignment Sales
• Revenue is not recognised until the goods are
  sold to the third party.
• Cash on delivery sales
• Revenue should not be recognised until cash is
  received by the seller or his agent from buyer.
• Sale by installment payment Delivery of goods
  on final payment
• Revenue from such sales should not be recognised
  until goods are delivered. However, when
  experience indicates that most such sales have
  been consummated, revenue may be recognised when
  a significant deposit is received.

16
When to recognise the revenue in following cases?

• Installment Sales
• When the consideration is receivable in
  installments, revenue attributable to the sales
  price exclusive of interest should be recognised
  at the date of sale. The interest element should
  be recognised as revenue, proportionately to the
  unpaid balance due to the seller.
• Sale/Repurchase Agreement
• When seller concurrently agrees to repurchase
  the same goods at a later date. - For such
  transactions that are in substance a financing
  agreement, the resulting cash inflow is not
  revenue as defined and should not be recognized
  as revenue. The same treatment would apply when
  the seller has a call option to repurchase or

17
When to recognise the revenue in following cases?

• the buyer has put option to require the
  repurchase by the seller of the goods. Under IAS
  and US GAAP, the recognition criteria are applied
  to tow or more transactions together when they
  are linked in such a way that the commercial
  effect cannot be understood without reference to
  the series of transactions as a whole. E.g. an
  enterprise may sell goods and, at the same time
  enter into a separate agreement to repurchase the
  goods at a later date, thus negating the
  substantive effect of the transaction in such a
  case, the two transactions are dealt with
  together. The provision under all three GAAPs on
  this issue is similar.

18
When to recognise the revenue in following cases?

• Sales to intermediate parties
• Revenue from such sales can generally be
  recognised if significant risks of ownership have
  passed. However, in some situation the buyer may
  in substance be an agent and in such cases the
  sale should be treated as consignment sales.
• Subscription for publication
• Revenue received or billed should be deferred
  and recognised either on a straight line basis
  over time or, where items delivered vary in value
  from period to period, revenue should be based on
  sales value of the the items delivered in
  relation to the total sales value of all items
  covered by the subscription.

19
When to recognise the revenue in following cases?

• Sale of immovable property
• Case A company entered into a sale deed of its
  immovable property before the end of the year,
  though the deed was registered with the registrar
  only subsequent to the balance sheet date because
  of approval from Housing Urban Development
  Authority (HUDA) was not yet received. Can sale
  and gain be recognised at the balance sheet date?

20
When to recognise the revenue in following cases?

• Response Both sales and gain should be
  recognised (in accordance with AS 9) at the
  balance sheet date if significant risk and reward
  of ownership has passed before the balance sheet
  date and what was pending was merely to receive
  HUDA approval and register the deed. It is
  important that at least the deed should have been
  executed before the balance sheet date and HUDA
  approval and registration did infect happened
  subsequent to the balance sheet date. One may
  have to assess if the HUDA approval is a critical
  formality for transferring the significant risk
  and reward of ownership.

21
When to recognise the revenue in following cases?

• One may have to look at the agreement clauses in
  details to identify if there is transfer of risk
  and rewards. For e.g. if there is no significant
  penalty for cancellation of the agreement because
  approval is not received from HUDA, it may be
  interpreted to mean that significant risk and
  reward pass only on approval from HUDA.
• If after considering the above fact it is
  decided to recognise revenue, it would be
  appropriate to state in the notes to accounts of
  the purchasing/selling company, the immovable
  property was not registered at the balance sheet
  date but was registered subsequently.

22
When to recognise the revenue in following cases?

• Revenue recognition for export sales on CIF
  basis.
• Case Export made on CIF basis were dispatched
  on 28th and 29th March, as evidenced by the Bill
  of Lading/Air way bill issued on these dates.
  Accordingly, sales were recognized for the year
  ended 31 March. The auditors did not agree with
  the contention of the company and commented that
  the sales and profit were overstated to the
  extent of above transaction. Their opinion was
  based on the following logic "Under a CIF
  contract, the property passes to the buyer as the
  shipping documents (if they are considered to be
  documents of the title to the goods according to
  the section 2(14) of the Sales of Goods Act) are
  handed over to them. In the above case documents
  were handed over to the bankers for collection
  after March 31.

23
When to recognise the revenue in following cases?

• Whether retention of documents (favoring the
  buyer) and presenting of them to the bankers for
  collection after 31st March in the normal course
  of trade and business can be construed as
  retention of risks and rewards of ownership and
  hence does not amount to transfer of property to
  the buyer within accounting period.
• Response An ordinary CIF contract is a
  contract (a) to ship at the port of shipment,
  goods of the description contained in the
  contract (b) to procure contract of affreightment
  under which goods will be delivered at the
  destination contemplated by the contract (c) to
  arrange for an insurance upon terms current in
  the trade which will be available to the buyer,
  (d) to make out proper invoice and (e) to
  tender these documents to the buyer, so that he
  can obtain delivery of goods on arrival or
  recover for their loss if they are lost on the
  voyage.

24
When to recognise the revenue in following cases?

• In a CIF contract, the question whether the
  property in the goods passes to the buyer depends
  on the question whether the seller has parted
  with the control over the disposal of the goods.
  It is not an unconditional contract because in
  commercial parlance, CIF presumes an undertaking
  by the seller to do something more, namely to
  put the goods on a ship and this postpones the
  passing of property until the goods are shipped
  by the seller. But the presumption that the
  property passes on shipment is a presumption as
  to the intention of the parties, and may be
  excluded either by the express terms of the
  contract or other circumstances.

25
When to recognise the revenue in following cases?

• Accounting for Sales Return
• Fact A company expects 2 sales return on an
  average in the month following the sales. Though
  the company is not legally obliged to accept the
  goods back (since they were accepted by the
  customer after proper inspection), it does so to
  maintain good business relations. At the year end
  how should the company account for the
  anticipated 2 sales return in respect of its
  last month sales?
• Response AS 9 contains the following
  provision Paragraph 9.3 - "When the uncertainty
  relating to collectability arises subsequent to
  the time of sales or rendering of the service, it
  is more appropriate to make a separate provision
  to reflect the uncertainty rather than to adjust
  the amount of revenue originally recorded".

26
When to recognise the revenue in following cases?

• The appendix to AS-9 provides the following
  guidelines, When delivery is made giving the
  buyer an unlimited right of return, revenue
  recognition will depend on the substance of the
  agreement. In the case of retail sales offering a
  guarantee of "money back if not completely
  satisfied", it may be appropriate to recognize
  the sale but to make a suitable provision for
  returns based on previous experience.
• Hence, in the above case its more appropriate to
  make the provision for margin that is not going
  to be realized on account of sales return.

27
When to recognise the revenue in following cases?

• Trade Discount and Volume Rebate given
• Trade discounts and volume rebates received are
  not encompassed within the definition of revenue,
  since they represent a reduction of cost. Trade
  discounts and volume rebates given should be
  deducted in determining revenue.
• Fact T Ltd. Purchased the goods on credit for
  Rs. 5 Crores for export from ABC Ltd. Upon the
  export order being cancelled, T Ltd. Decided to
  sell the same in the domestic market at a
  discounted price. Accordingly, ABC Ltd was
  requested to offer a price discount of 25. ABC
  Ltd. wants to adjust the sales figure to the
  extent of discount requested by T Ltd.

28
When to recognise the revenue in following cases?

• Response ABC Ltd. Had sold goods on credit
  worth Rs. 5 Crores to T Ltd. And therefore the
  sales was complete in all respects. T Ltd's
  decision to sell the same in the domestic market
  at a discount does not affect the amount booked
  under sales by ABC Ltd. The price discount of 25
  offered by ABC Ltd. at a request of T Ltd. was
  not in the nature of discount given during the
  ordinary course of trade because otherwise it
  would have been given at the time of sale itself.
  Now as far as ABC ltd. is concern, there appears
  to be uncertainty relating to collectability,
  which has arisen subsequent to the time of sale,
  it would be appropriate to make a separate
  provision to reflect the uncertainty relating to
  collectability rather than to adjust the amount
  of revenue originally recorded. Therefore, such
  discount should be written off to the profit and
  loss account and not shown as deduction from the
  sales figure.

29
B. RENDERING OF SERVICES

• Revenue from the rendering of services can be
  recognised based on the following two methods
• Proportionate Completion Method
• Performance consist of execution of more than
  one act. Revenue is recognised based on the
  performance of each act. The amount of revenue to
  be recognised is determined based on contract
  value, associated cost, number of acts or other
  suitable basis.

30
B. RENDERING OF SERVICES

• Completed Service Contract Method
• Performance consist of execution of single act.
  Alternatively, services are performed in more
  than a single act and the services yet to be
  performed are so significant in relation to the
  transaction taken as a whole that a performance
  can not be deemed to have been completed until
  execution of those acts. Hence, the revenue is
  recognised when sole or final act takes place and
  service becomes chargeable.

31
When to recognise the revenue in following cases?

• Freight and Handling Income
• Fact The company is engaged in the business of
  handling and transportation of containerised
  cargo. Freight and Handling income/expenses are
  accounted for at the time of booking of
  containers. Ground rent and wharfrage are
  accounted for at the time of release of
  containers on completed service contract method.
  Claims and penalties are accounted at the time of
  settlement. Whether the accounting treatment is
  correct?

32
When to recognise the revenue in following cases?

• Response The accounting policy being followed
  by the company for recognition of revenue arising
  from freight and handling income are not in
  accordance with AS 9 and section 209 of the
  companies act 1956. Freight and handling
  income/expenses should be accounted for as and
  when the service are rendered. Claims and
  penalties are accounted for on a product basis
  when the obligation arises, rather than at the
  time of settlement. The revenue from ground rent
  should be recognized on straight line over the
  period.

33
When to recognise the revenue in following cases?

• Installation Fees
• In cases where installation fees are other than
  incidental to the sale of a product, they should
  be recognized as revenue only when the equipment
  is installed and accepted by the customers.
• Freight on incomplete Voyage
• Some shipping companies recognise freight income
  only when the voyage is complete. Other companies
  recognise freight on pro-rata basis for voyages
  in progress at the balance sheet date. The
  practice in India is mixed . In any case,
  whichever method is followed, cost should be
  matched to the revenue recognised. Thus, if on
  incomplete voyage, revenue is not recognised,
  cost on such voyage should be carried forward as
  WIP. If on the other hand revenue is recognised
  on pro-rata, the corresponding pro-rata cost
  should also be recognised in the profit and loss
  account.

34
When to recognise the revenue in following cases?

• Internet Service
• Internet service providers provide internet
  access to customers at a given price for a
  specified number of hours to be used within a
  specified period. Most internet service providers
  recognize revenue based on the usage by the
  customers. At the end of the specified period,
  the remaining unutilized hours, if any are
  recognized as revenue.
• Revenue from banner advertisement and
  sponsorship contracts hosted on the website of
  the service provider is recognized ratably over
  the period in which the advertisement are
  displayed. Revenue from electronic commerce
  transactions are recognized when the transaction
  is complete.

35
When to recognise the revenue in following cases?

• Advertising and insurance agency commission
• Revenue should be recognized when the service is
  completed. For advertising agencies, media
  commissions will normally be recognized when the
  related advertisement or commercial appears
  before the public and the necessary intimation is
  received by the agency, as opposed to production
  commission, which will be recognized when the
  project is completed. Insurance agency
  commissions should be recognized on the effective
  commencement or renewal dates of the related
  policies.

36
When to recognise the revenue in following cases?

• Financial Service commission
• A financial service may be rendered as a single
  act or may be provided over a period of time.
  Similarly, charges for such services may be made
  as a single amount or in stages over the period
  of the service or the life of the transaction to
  which it relates. Such charges may be settled in
  full when made or added to a loan or other
  account and settled in stages. The recognition of
  such revenue should therefore have regard to
• (a) Whether the service has been provided once
  and for all or is on a continuous basis.
• (b) the incidence of the costs relating to the
  service

37
When to recognise the revenue in following cases?

• (c) When the payment for the service will be
  received. In general, commission charged for
  arranging or granting loan or other facilities
  should be recognised when a binding obligation
  has been entered into. Commitment, facility or
  loan management fees which relate to continuing
  obligations or services should normally be
  recognized over the life of the loan or facility
  having regard to the amount of the obligation
  outstanding, the nature of the services provided
  and the timing of the costs relating thereto.

38
When to recognise the revenue in following cases?

• Front end fees/ Processing fees
• Front end fees or processing fees are received
  under various situations, for example, a housing
  finance company receives it on sanction of the
  loan or a lessor receives lease management fees
  on a grant of lease, etc. Theoretically, there
  are essentially, three ways in which such income
  can be recognized.
• (a) Recognize the entire fees upfront i.e. on
  sanction of the loan or lease contract.
• (b) Recognize the fees equally over the period
  of the loan or lease agreement.

39
When to recognise the revenue in following cases?

• (c) Recognize fees upfront to the extent of the
  cost incurred for processing the loan or lease
  arrangement, which will then be followed by an
  equal distribution of the remainder of the fees
  over the life of the loan or lease contract.
• Admission fees
• Revenue from artistic performances, banquets
  and other special events should be recognized
  when the event takes place. When a subscription
  to a number of events is sold, the fee should be
  allocated to each event on a systematic and
  rational basis.

40
When to recognise the revenue in following cases?

• Franchisee fees of Training Institute
• Fact A well known computer training
  institute appointed some franchisee to conduct
  training. The institute earns franchisee fees in
  exchange of its brand and technical assistance.
  The franchisee fees is payable in lumpsum or in
  installments and is non-refundable. The institute
  wants to recognize the franchisee fees in the
  profit and loss account upfront, is that
  acceptable?
• Response The franchisee fees are in the
  nature of royalty in exchange of a right to use
  an asset (brand) over a defined period of time
  and therefore revenue on franchisee fees should
  be recognised on a time proportion basis over the
  period of agreement unless

41
When to recognise the revenue in following cases?

• having regard to substance of the transaction,
  if some other systematic or rational basis is
  more appropriate in which case that basis may be
  adopted. However, recognizing the entire
  franchisee fee upfront would be unreasonable.

42
When to recognise the revenue in following cases?

• Training Fees and Registration Fees received in
  Advance
• Training fees should be recognized on accrual
  basis proportionately over the period of
  instructions.
• Fact A company grants license for certain
  number of years to the franchisee for using the
  companys brand name and full assistance of
  technical know-how in the field of providing
  education and training in IT and to use
  intellectual property for which the company takes
  registration fees. How are the registration fees
  accounted for?
• Response The registration fees should be
  recognized on a time proportion basis over the
  period of agreement.

43
When to recognise the revenue in following cases?

• Income from consultancy fees
• As 7 would apply to revenue Recognition from
  consultancy fees received only for design
  engineering and project management directly
  related to construction of an asset whereas,
  revenue from consultancy fees received for design
  engineering and project management not directly
  related to construction of an asset would be
  recognized as per AS 9.
• recognition of revenue from design engineering
  on turnkey projects directly related to
  construction of an asset on a pre-determined
  fixed percentage basis would be appropriate
  provided it represents the stage of the
  completion achieved on the relevant project at
  the end of each year. The stage of completion on
  the contract should be determined by considering
  all relevant factors as stated in AS 7 and no
  special weightage should be given to a single
  factor.

44
When to recognise the revenue in following cases?

• With regard to recognition of revenue from
  consultancy fees received from design engineering
  on other than turnkey projects and for project
  management directly related to construction
  contract, the recognition of revenue on the basis
  of bills raised may not be appropriate since
  there may be cases where the work has been
  completed up to the relevant stage but the bill
  has not been raised. Accordingly, the raising of
  bills should not be the criteria for recognition
  of revenue.
• The profit arising from recognition of revenue
  in respect of the projects covered by above paras
  should be recognized only where the work has
  progressed to a reasonable extent on the project.
  However, provision for all the foreseeable losses
  on the project should be made irrespective of the
  stage of completion achieved on the contract.

45
When to recognise the revenue in following cases?

• With regard to recognition of revenue from
  consultancy fees received from design engineering
  on other than turnkey projects and for project
  management directly related to construction
  contract, the recognition of revenue on the basis
  of bills raised may not be appropriate since
  there may be cases where the work has been
  completed up to the relevant stage but the bill
  has not been raised. Accordingly, the raising of
  bills should not be the criteria for recognition
  of revenue.
• The profit arising from recognition of revenue
  in respect of the projects covered by above paras
  should be recognized only where the work has
  progressed to a reasonable extent on the project.
  However, provision for all the foreseeable losses
  on the project should be made irrespective of the
  stage of completion achieved on the contract.

46
When to recognise the revenue in following cases?

• Revenue from consultancy fees received in
  respect of procurement projects and for design
  engineering and project management not directly
  related to construction of an asset should be
  recognized as per AS 9.
• The revenue should be recognized on a suitable
  basis at a particular stage of rendering of
  service that would relate the revenue to the
  services rendered provided no significant
  uncertainty exists regarding the amount of the
  consideration that will be derived from rendering
  the service at the time of recognition. The
  stage of service rendered should be determined on
  the basis of consideration receivable, associated
  costs and performance made up to the end of the
  year.
• The revenue arising from revision in the cost of
  the projects could be recognized in the
  accounting year in which the fact is known to the
  extent to which it relates to the stage of
  completion provided no significant uncertainty
  exists regarding the amount of consideration
  receivable.

47
B. REVENUE FROM USE BY OTHERS OF ENTERPRISE
RESOURCES YIELDING INTEREST, DIVIDEND AND ROYALTY

• INTEREST
• Charges for the use of Cash resources or amounts
  due to the enterprise.
• Recognized on accrual basis based on the
  outstanding amount and rate applicable. (Para
  8.2)
• ROYALTY
• Charges for the use of such assets as know-how,
  patents, trade marks and copy rights.
• Recognized based on the relevant agreement or
  unless having regard to the substance of the
  transactions, it is more appropriate to recognize
  revenue on some other systematic basis. (Para
  8.3)

48
B. REVENUE FROM USE BY OTHERS OF ENTERPRISE
RESOURCES YIELDING INTEREST, DIVIDEND AND ROYALTY

• DIVIDEND
• Rewards from the holding of investment in
  shares.
• Recognized in the profit and loss account only
  on the right to receive payment is established.
  (Para 8.4)
• INTEREST, ROYALTY AND DIVIDEND FROM FOREIGN
  COUNTRIES (PARA 8.5)
• If the above income is earned from foreign
  countries and requires exchange permission and
  uncertainty in remittance is anticipated, revenue
  recognition may need to be postponed.

49
When to recognise the revenue in following cases?

• Interest on Overdue Debtors
• Fact The invoice, if not paid within the
  stipulated period, attracts interest at a rate of
  1 above the rate of bank borrowings. An analysis
  of the debtors recently revealed that the
  interest accrued and accounted in earlier years
  had very poor rate of acceptance and recovery. In
  many cases the amounts of interest had been
  protested and in some cases contested and sought
  to be adjusted after necessary rectification in
  the original invoices for low-grade supplies.
  There is also an apprehension about recovery of
  the face value of mounting invoice on which
  interest is provided on accrual basis. Under
  these circumstances, how should such interest be
  recognized?

50
When to recognise the revenue in following cases?

• Response Interest on overdue outstanding
  should be accounted for on accrual basis.
  However, in case of any particular overdue
  outstanding of the company, if, at the time of
  accrual interest income, there is a significant
  uncertainty as to the ultimate collectability of
  the interest accrued thereon or any part thereof,
  recognition of such interest income should be
  postponed. The interest income, the recognition
  of which has been postponed, should be taken as
  revenue only in the period in which it is
  reasonably certain that the ultimate collection
  will be made. However, if the uncertainty
  relating to collectability thereof arises
  subsequent to the recognition of interest income,
  it would be appropriate to make a provision to
  reflect the uncertainty.

51
When to recognise the revenue in following cases?

• Dividend Income
• The right to receive dividend should be
  construed as right to receive dividend by the
  balance sheet date. Therefore, if dividend has
  been declared after the balance sheet date of a
  company holding such investment, dividend will be
  recorded as income for the year in which such
  dividend is declared, since the right to receive
  dividend did not exist as on balance sheet date.
• Fact Your client that has calendar year end is
  a shareholder of AbyBaby Ltd. In March 2004, your
  client is in the process of finalizing year ended
  31 December 2003 accounts. AbyBaby had their AGM
  in January 2004 in which it declared dividend and
  Rs. 5 million was received by your client in
  February 2004. Your client has recognized the
  dividend in the December 2003 accounts. As
  auditors are you in agreement?

52
When to recognise the revenue in following cases?

• Response Under AS 9 dividend is recognized
  when the right to receive dividend is
  established. The right to receive dividend
  should be construed as right to receive dividend
  by the balance sheet date. Therefore, if the
  dividend is declared after the balance sheet date
  of the company holding such investment, dividends
  will be recorded as income for the subsequent
  year, since the right to receive dividend by the
  balance sheet date did not exist. In the given
  case, the client will have to recognize the
  dividend income for the year ended 31 December
  2004, since during that year, AGM of the investee
  was held based on which right to receive dividend
  was established. A point to be noted is that the
  right to received final dividend is generally
  established at the AGM, whereas the right to
  receive interim dividend is generally established
  when the dividend is actually received. The right
  to receive interim dividend is not established
  when the board declares such interim dividend,
  since the board has a right to revoke that
  decision.

53
Effects on Uncertainties on Revenue

• Revenue is measurable and ultimate collection is
  reasonable.
• At the time of raising of any claim like
  escalation of price, export incentive, the
  ability to assess the ultimate collection with
  reasonable certainty is lacking, the recognition
  of revenue is postponed to the extent of
  uncertainty is involved.
• If the uncertainty regarding the collectability
  of revenue arises after the sales or rendering of
  services, separate provision of the same is made
  in the books instead of adjusting the amount
  against the original revenue recorded.

54
Effects on Uncertainties on Revenue

• The essential criteria for recognition of revenue
  in all the three cases given above i.e. Sales of
  goods, rendering of services or use by others of
  enterprise resources is the amount of
  consideration receivable should be determinable.
  If such consideration is not determinable, the
  revenue should be postponed.
• When recognition of revenue is postponed due to
  the effect of uncertainties, it is considered as
  revenue of the period in which it is properly
  recognized.

55
Main Principles

• Revenue form the Sales or service transactions
  should be recognized only when the requirement of
  Para 11 and 12 are satisfied provided the
  expected ultimate collection is reasonable.
• The amount of revenue should be disclosed on the
  face of Profit and loss in the following manner.
• Turnover XX
• Less Excise Duty XX
• Turnover (Net) XX
• The amount of excise duty to be deducted from
  Turnover is total excise duty for the year except
  the excise duty related to the difference between
  the closing stock and opening stock as the same
  needs to be shown separately in the statement of
  profit and loss with explanatory note in notes to
  accounts to explain the nature of the two amounts
  of excise duty.

56
What is performance?

• In case of sales of Goods
• In case of transactions for sales of goods, the
  following two conditions should be satisfied to
  recognize the revenue.
• The seller of the goods has transferred to the
  buyer the property in the goods for a price or
  all significant risks and rewards of ownership
  have been transferred to the buyer and the seller
  retains no effective control of the goods
  transferred to a degree usually associated with
  ownership and
• No significant uncertainty exists regarding the
  amount of consideration that will be derived
  from the sale of the goods.

57
What is performance?

• In case of rendering of service
• 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.
• In case of use by others of enterprise resources
• Revenue should be recognized only when no
  significant uncertainty as to measurability or
  collectability exists.

58
What is performance?

• Interest On a time proportion basis taking into
  account the amount outstanding and the rate
  applicable.
• Royalties On an accrual basis in accordance
  with the terms of the relevant agreement.
• Dividend When the owner's right to receive
  payment is established.

59
Disclosure

• In addition to the disclosure requirement of
  Accounting standard 1 on "Disclosure of
  Accounting Policies", an enterprise should also
  disclose the circumstances in which revenue
  recognition has been postponed pending the
  resolution of significant uncertainties.

60
IFRS IGAAP DIFFERENCE

• Definition
• Under IGAAP revenue is defined as Revenue is
  the gross inflow of cash, receivables or other
  consideration arising in the course of ordinary
  activities of an enterprise from the sale of
  goods, from the rendering of services and from
  the use by others of enterprise resources
  yielding interest, royalty and dividend. 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,
  receivable or other consideration.

61
IFRS IGAAP DIFFERENCE

• Under IFRS revenue is defined as the gross
  inflow of economic benefits during the period
  arising from the ordinary activities of an
  enterprise when the inflows results in an
  increase in equity, other than increase relating
  to contribution from equity participants. Also
  the amount collected on behalf of third parties
  such as sales and service taxes and value added
  taxes are excluded from revenue.

62
IFRS IGAAP DIFFERENCE

• Measurement
• Under IGAAP, the revenue is recognised at
  nominal amount i.e. cash and cash equivalent
  received or receivable.
• Under IFRS, the revenue is measured at fair
  value of consideration received or receivable in
  case where the inflow of such consideration is
  deferred.

63
IFRS IGAAP DIFFERENCE

• Exchange Transactions
• In case of IFRS, the exchange transactions is
  recorded in the books in case of dissimilar
  exchange of goods or services whereas under IGAAP
  there is no such specific guidance available.
• Multiple-element arrangements
• No detailed guidance for such contracts are
  available both under IFRS as well as IGAAP but
  under IFRS, the recognition criteria are usually
  applied to the separately identifiable components
  of a transaction in order to reflect the
  substance of the transactions. However, the
  recognition criteria are applied to two or more
  transactions together when they are linked in
  such a way that the whole commercial effect can
  not be understood without reference to the series
  of transactions as a whole and under IGAAP,
  company is applying the same principle.