revenue reognizzation

1. Presented by
CA Sandip Chandarana
1

2. OBJECTIVES
 Recognition of revenue in the statement of profit
and loss account arising in the ordinary course of
business i.e. from
A. The Sale of Goods
B. The Rendering of Services ; and
C. The use by Others of enterprise resources
yielding interest, royalties and dividends.
2

3. APPLICABILITY
 This standard does not apply to
1. Revenue arising from Construction Contracts.
2. Revenue arising from Hire Purchase or Lease
Agreements.
3. Revenue arising from Government Grants or
Other Similar subsidies.
4. Revenue of Insurance Companies arising from
insurance business.
3

4. DEFINITIONS
1) 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.
4

5. DEFINITIONS
2) 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.
3) 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.
5

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.
6

7. When to recognise the revenue in
following cases?
1. 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.
7

8. When to recognise the revenue in
following cases?
2. Delivery delayed at buyer’s 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.
8

9. When to recognise the revenue in
following cases?
3. 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
9

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
10

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.
11

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.
12

13. When to recognise the revenue in
following cases?
4. Delivery subject to conditions
a) 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.
13

14. When to recognise the revenue in
following cases?
b) 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.
c) 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.
14

15. When to recognise the revenue in
following cases?
d) Consignment Sales
Revenue is not recognised until the goods are sold to
the third party.
e) Cash on delivery sales
Revenue should not be recognised until cash is received
by the seller or his agent from buyer.
5. 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.
15

16. When to recognise the revenue in
following cases?
6. 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.
7. 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 16

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.
17

18. When to recognise the revenue in
following cases?
8. 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.
9. 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.
18

19. When to recognise the revenue in
following cases?
10. 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?
19

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.
20

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.
21

22. When to recognise the revenue in
following cases?
11. 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.
22

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.
23

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.
24

25. When to recognise the revenue in
following cases?
12. 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".
25

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.
26

27. When to recognise the revenue in
following cases?
13. 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.
27

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.
28

29. B. RENDERING OF SERVICES
Revenue from the rendering of services can be
recognised based on the following two methods :
1. 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.
29

30. B. RENDERING OF SERVICES
2. 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.
30

31. When to recognise the revenue in
following cases?
1. 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?
31

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.
32

33. When to recognise the revenue in
following cases?
2. 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.
3. 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.
33

34. When to recognise the revenue in
following cases?
4. 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.
34

35. When to recognise the revenue in
following cases?
5. 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.
35

36. When to recognise the revenue in
following cases?
6. 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;
36

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.
37

38. When to recognise the revenue in
following cases?
7. 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.
38

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.
8. 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.
39

40. When to recognise the revenue in
following cases?
9. 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
40

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.
41

42. When to recognise the revenue in
following cases?
10. 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 company’s 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.
42

43. When to recognise the revenue in
following cases?
11. 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. 43

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.
44

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.
45

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.
46

47. B. REVENUE FROM USE BY OTHERS OF
ENTERPRISE RESOURCES YIELDING INTEREST,
DIVIDEND AND ROYALTY
1. 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)
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)
47

48. B. REVENUE FROM USE BY OTHERS OF
ENTERPRISE RESOURCES YIELDING INTEREST,
DIVIDEND AND ROYALTY
3. 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)
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.
48

49. When to recognise the revenue in
following cases?
1. 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?
49

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.
50

51. When to recognise the revenue in
following cases?
2. 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?
51

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.
52

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.
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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.
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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.
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56. What is performance?
1. 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.
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57. What is performance?
2. 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.
3. In case of use by others of enterprise resources
 Revenue should be recognized only when no significant
uncertainty as to measurability or collectability exists.
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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.
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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.
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60. IFRS & IGAAP DIFFERENCE
1. 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.
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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.
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62. IFRS & IGAAP DIFFERENCE
2. 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.
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63. IFRS & IGAAP DIFFERENCE
3. 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.
4. 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.
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