Conceptual Idea:
To understand
this standard first we need to understand the meaning of 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, or from
rendering of service, or from use by others of enterprise resources yielding
interest, dividends and royalties.
Revenue is
the gross inflow,(that is without deducting any expenses)
Of cash,
receivables,
or other consideration (that is, giving same
value of goods or providing services)
Arises from,
The sale of
goods, or from rendering of services, or from enterprise resources used by
others
1st
case..sale of goods..when we sold 5 shirts @1000 per shirts we will get Rs
5000. This Rs 5000 is revenue derived from sale of goods.
2nd
case..rendering of service… in above example, if we charge 5000 to make design
on that shirt, that Rs 5000 would be our revenue from rendering of services.
3rd
case..when we purchase the shares of company , it uses our cash resource in its
business and gives us dividend. This dividend is the revenue derived from the
use of our resources by others. Apart from this, the royalty payment for the
use of patent, trademarks, etc have also been included in this category.
The agency
company; get commission for their service, this commission is their revenue.
From the
above definitions it is clear that revenue is not always in cash. Suppose the
company sold 1 lakh shirts during the year @of 500 per shirt. The party paid 3
crore during the year, and remained due 2 crore. Here the revenue will be 5
crore NOT 3 crore--cash we received during the year; it will also include
receivables increased during the year. That’s why the definition says “Revenue
is the gross inflow of cash, receivables and other consideration arising either
from the sale of goods, rendering of services or use of enterprise resources by
other”.
Now certain
items are excluded from the definition of revenue for the purpose of this
standard; they are:
1)
Gains
from the disposal of non-current assets.
2)
Gains
from the holding of non-current assets. Example appreciation in the value of
fixed assets.
3)
Gains
resulting from the change in the foreign exchange rates and adjustments arise
in translation in foreign currency in financial statements.
4)
Gains
resulting from the restatement of the carrying amount of obligation.(suppose in
the beginning of the year the obligation to be discharged is Rs 2 lakh, in the
mid year this obligation is restated to Rs 180,000. Here gains of 20,000 will
not be revenue of that enterprise)
5)
Gains
resulting from the discharge of obligation at less than its carrying amount.(in
the above example suppose at the time of discharging the obligation at the end
of the year the company is required to pay 150,000, here gains of 30,000 will
not be revenue)
This standard will not be applicable in the following
situation:
1)
Revenue
under construction contract.
2)
Revenue
from govt. grant
3)
Revenue
of insurance companies from insurance contract.
4)
Revenue
from lease, hire purchase.
Now the main
reason why this standard has been introduced is to explain the timings of
recognition of revenue in the statement of profit and loss account. This is
stated below:
As we
know there are 3 category from which the revenues are expected to derive:
1)sale of
goods, 2) rendering of services and 3) use of enterprise resources by others.
we will learn the timing of these three category in detail.
Sale of
goods:
There are 3
criteria to regard the transaction as sale of goods.
1)
When
the CONSIDERATION is involved in the transfer of goods between two parties
(that is when the goods are transferred to other company as gift it will not be
called sale).
2)
There
is no UNCERTAINTY exists regarding the amount of this consideration(that is if
there is a doubt regarding the price or the negotiation is going on between the
buyer and seller, the seller can’t recognize the sale in the statement of
account until negotiation is completed and final amount is derived) . And,
3)
When
the RISK AND REWARD related with the goods are transferred to the buyer (suppose
the sale of the goods are agreed, but there is a delay in delivering goods
because of the fault of seller, here the seller can’t recognize the sale until
the goods are delivered to the buyer because the undelivered goods lying in the
warehouse is at the risk of seller. However, if the delay was the buyer’s fault
then seller can recognize that sale on the same date).
Some special
cases to consider for recognizing revenue for sale of goods:
1)
Sales
against advance payment—
When the full or partial payment is received in advance for
the goods not in stock that is they are not available currently but will be
manufactured later, then the revenue from that sale will be recognized when the
goods are manufactured and ready for delivery.
2)
Barter
transaction—
When the goods and services are
exchanged for goods and services of similar nature and value; then it will not
be recognized as revenue but if they are dissimilar then it will be regarded as
transaction generating revenue and should be recognized at fair value.
3) Sale depends
upon condition:
Sometimes
sales depend upon the installation and inspection process in this case when the
customer is satisfied after the installation; at that time revenue should be
recognized. But if the installation process is simple no chance of rejection,
it can be recognized then.
4) Guaranteed
sale—
In the
guaranteed sale, when seller gives the guarantee “for money back if don’t like
the product” then the company can recognize the sale after taking the proper
provisions according to the past experience for return.
5) Consignment
sale—
Revenue is
not recognized until the goods are sold to the third party.
6) Repurchase of
goods—
When the
seller agrees to repurchase the goods, it will not be regarded as sale hence
not to be recognized.
7) Installment
sales----
When the
consideration is receivable in installment; the revenue exclusive of interests
is recognized at the time of sales and the interest elements to be recognized
as revenue proportionate to unbalance amount due to seller.
8) Effect of
uncertainties in the revenue recognition:
At the time
of sale when there is uncertainty about the realization of amount then the
revenue recognition of that sale must be postponed, and will be recognized in
the year in which certainty exists. Sometimes uncertainty exists after the sale
in that situation proper provision is made in the profit and loss account
regarding the expected loss.
9) Rendering of
services:
Revenue from
the service transaction is recognized when the service is performed, either
from the proportionate completion method or completed service contract method.
In the
proportionate completion method, revenue is recognized proportionately with the
degree of completion of service under contract. This method is used when the
whole service contract can be segregated into number of stages and it’s
possible to determine the cost and revenue of each stage and there is certainty
about the recovery of revenue.
Under CSCM
revenue is recognized when the whole service contract is completed. This method
is applied when the work is in such a way that each and every stage is dependent
on other stage and recovery of revenue depends on the completion of whole
service contract.
10) Cases to be
considered in recognizing revenue under rendering of service:
Installation
fees: Revenue from installation; other than incidental to the sale of a
product, are recognized when the
equipment is installed and accepted by the customer.
11) Commission of
insurance agency and advertising agencies:
Insurance
agency will recognize the commission as revenue when that insurance policy
commence.
For
advertising agency, media commission will be recognized when information
appeared before public.
Production
commission will be recognized as revenue when the project is completed.
12) Financial
service commission:
A financial
service may be rendered as a single set or may be provided over a period of
time. Similarly the charges for such services may be recognized as a single
amount or in stages over the period of service or the life of transaction to
which it relates.
13) Processing
fees:
Processing
fees are received under various conditions, for example housing finance company
receives it for the sanction of loan, or a lessor receives lease management
fees to grant the lease. These fees are recognized in three ways: a) recognize
the entire fees upfront on the sanction of loan or lease. B) recognize the fees
equally over period of loan or lease. c) recognize the fees upfront to the
extent of cost incurred for processing the loan or lease arrangements which
will then be followed by equal distribution of the remainder of fees over the
life of loan or lease.
14) Admission
fees:
Revenues from
artistic performances, banquets and other special events should be recognized when
the events takes place.
15) Use by others
of enterprise resources yielding interests, royalty, and dividends:
Interests…it
is the charges for the use of cash resources or for outstanding amount.
Recognize…it
should be recognized on time proportionate basis taking into an account the
amount outstanding and the rate applicable.
Royalty…it is
the charges for the use of assets such as patent, trademark, know-how, etc.
Recognized..on
accrual basis in accordance with the terms of the agreement.
Dividends…it
is the rewards for the holding of investments in shares.
Recognized…it
is recognized when the owner’s right to receive the payment is established.
Basic
criteria…the basic criteria to recognize revenue is that the amount receivable
is determinable. If there is doubt regarding the determination of amount,
revenue recognition must be postponed.
DISCLOSURE:
In addition
to the disclosure required under AS 1, the enterprise is also required to
disclose the circumstances in which revenue recognition has been postponed
pending the resolution of significant uncertainties.
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