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Presentation on Accounting Standard 9
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PRESENTATION ON ACCOUNTING STANDARD 9
MMM (2013 - 16) GROUP 5 Presentation for Financial Accounting Topic – Accounting Standard 9
ACCOUNTING STANDARD 9
Group 5 -
Members (in order of Presentation)
Name Roll No.
Manojkumar Patil 28
Sagar Patekar 19
Kamlesh Gond 95
Kunal Sonawne 93
Aabid Mushrrif 01
Digambar Kosamkar 80
Revenue is the gross inflow of cash, receivables or other consideration arising in the course of the ordinary activities of an enterprise from the
Sale of goods Rendering of services and Use by others, of enterprise resources,
yielding interest, royalties and dividends
Recognition – Process of recording and reporting an item as an
element of financial statement
The revenue recognition principle provides that revenue is recognized:when it is earned, andwhen it is realized or realizable
Revenue is earned when the earnings process is substantially completeRevenue is realized when goods and services are exchanged for cash or claims to cashRevenue is realizable when assets received are convertible into a known amount of cash
PrinciplesPrinciples
The following terms are used in this Standard with the meanings specified:
Revenue is the gross inflow of cash, receivables or other consideration arising in the course of the ordinary activities of an enterprise4 from the sale of goods, from the rendering of services, and from the use by others of enterprise resources yielding interest, royalties and dividends.
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, receivables or other consideration.
Revenue from selling products is recognized at the date of sale (date of delivery).
Revenue from services is recognized when services are performed and are billable.
Revenue from the use of enterprise’s assets by others is recognized as time passes or as the assets are used up.
Revenue from disposal of assets (other than inventory) is recognized at the point of sale as gain or loss.
Four Types of Revenue Four Types of Revenue TransactionsTransactions
REVENUE RECOGNITION AT REVENUE RECOGNITION AT POINT OF SALEPOINT OF SALE
Before we discuss the recognition principle and accounting treatment for sales under sale or return conditions. First lets have
ourselves clear about what is meant by Sale or Return?
Under sale or return, the goods are sent by the supplier to the customer with an understanding that customer does not have to pay for such goods until these goods are used or sold by the customer and if such goods are not sold or used then customer will return such goods back to supplier. Now what constitutes the sale or use may depends upon the contract between the supplier and customer and things may get very technical. For example, customer was able to sell part of the shipment sent by the supplier and now wants to send the rest back to supplier but supplier insists that sale of whole package has occurred and the rest of the goods now belong to the buyer. This and many other situations make sale of goods very interesting complex things to solve. For the same reason we have Sales of Goods Act.Coming back to the question
Revenue from Sale of Goods
In order to understand whether we can recognize revenue in respect of such goods which have been sent under sale or return option, we have to understand the basic recognition principle or criteria given by International Accounting Standard IAS 18 Revenue.
According to IAS 18 para 14, revenue on sale of goods shall be recognized (only) when the following set of conditions is fulfilled:1.the entity has transferred to the buyer the significant risks and rewards of ownership of the goods;
2. the entity retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold;
3. the amount of revenue can be measured reliably;
4. it is probable that the economic benefits associated with the transaction will flow to the entity; and
5. the costs incurred or to be incurred in respect of the transaction can be measured reliably.
Revenue from Sale of Goods
The condition relevant to our current discussion is that revenue shall be recognized when:the entity has transferred to the buyer the significant risks and rewards of ownership of the goods;
Revenue from Sale of Goods
Revenues from manufacturing and selling are commonly recognized at point of saleExceptions:
1. Sales with buyback agreements2. Sales when right of return exists (high rates that are
not reliably estimable)3. Trade loading/channel stuffing
Revenue Recognition at Revenue Recognition at Point of SalePoint of Sale
Revenue from Sale of Goods
Revenue recognition is deferred when collection of sales price is not reasonably assured and no reliable estimates can be made
The two methods that are used are:The installment sales method.The cost recovery method.
If cash is received prior to delivery, the method used is the deposit method
Revenue Recognition After Revenue Recognition After DeliveryDelivery
Revenue from Sale of Goods
This method emphasizes income recognition in periods of collection rather than at point of sale
Title does not pass to the buyer until all cash payments have been made to the seller
Both sales and cost of sales are deferred to the periods of collection
Other expenses, selling and administrative, are not deferred
The Installment Sales The Installment Sales MethodMethod
Revenue from Sale of Goods
Seller recognizes no profit until cash payments by buyer exceed seller’s cost of merchandise.
After recovering all costs, seller includes additional cash collections in income.
This method is to be used where there is no reasonable basis for estimating collectibility as in franchises and real estate.
The income statement reports the amount of gross profit recognized and the amount deferred.
The Cost Recovery MethodThe Cost Recovery Method
Revenue from Sale of Goods
Seller receives cash from buyer before transfer of goods or performance
The seller has no claim against the purchaser.
There is insufficient transfer of risks to buyer to warrant recording a sale by seller
In the case of such incomplete transactions, the deposit method is used
The deposit method thus defers sale recognition until a sale has occurred for accounting purposes
The Deposit MethodThe Deposit Method
Revenue from Sale of Goods
Revenue from service transactions is usually recognised as the service is performed, either by the proportionate completion method or by the completed service contract method.
(i) Proportionate completion method (ii) Completed service contract method
Revenue from Rendering of Services
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 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.
Revenue from Rendering of Services
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.
Revenue from Rendering of Services
Installation Fees Advertising and insurance agency
commissions Financial service commissions Admission fees Tuition fees Entrance and membership fees
Revenue from Rendering of Services
Revenue arising from the use by others of enterprise resources yielding interest, royalties and dividends should only be recognised when no significant uncertainty as to measurability or collectability exists. These revenues are recognised on the following bases:
(i) Interest : on a time proportion basis taking into account the amount outstanding and the rate applicable.
(ii) Royalties : on an accrual basis in accordance with the terms of the relevant agreement.
(iii) Dividends from investments in shares: when the owner’s right to receive payment is established.
Revenue from Income from Others
AS 9 DOES NOT DEAL WITH THE FOLLOWING TYPES OF REVENUE :
This Standard does not deal with the following aspects of revenue recognition to which special considerations apply:(i) Revenue arising from construction contracts;(ii) Revenue arising from hire-purchase, lease agreements (iii) Revenue arising from government grants and other similar subsidies; (iv) Revenue of insurance companies arising from insurance contracts.
Exclusions of AS 9
Examples of items not included within the definition of “revenue” for
the purpose of this Standard are:
(i) Realised gains resulting from the disposal of, and unrealised gains resulting from the holding of, non-current assets e.g. appreciation in the value of fixed assets;
(ii) Unrealised holding gains resulting from the change in value of current assets, and the natural increases in herds and agricultural and forest products;
(iii) Realised or unrealised gains resulting from changes in foreign exchange rates and adjustments arising on the translation of foreign currency financial statements;
(iv) Realised gains resulting from the discharge of an obligation at less than its carrying amount;
(v) Unrealised gains resulting from the restatement of the carrying amount of an obligation.
Exclusions of AS 9
Revenue may be recognized before delivery under certain circumstances
Long-term construction contracts are a notable exampleTwo methods available are :
The percentage-of-completion method, and
The completed contract method
Revenue Recognition Before Revenue Recognition Before DeliveryDelivery
Long-Term ConstructionAccounting Methods
1) Terms of contract must be certain, enforceable2) Certainty of performance by both parties3) Estimates of completion can be made reliably
1) To be used only when the percentage method is inapplicable [uncertain]2) For short-term contracts
Percentage-of-CompletionMethod
Completed ContractMethod
Revenue Recognition Before Revenue Recognition Before DeliveryDelivery
Costs incurred to date = Percent completeMost recent estimated total costs
11
Estimated total revenue x Percent complete = Revenue to be recognized to date
22
Total revenue to be recognized to date less Revenue recognized in PRIOR periods = Current period revenue
33
Current Period Revenue less current costs = Gross profit44
Percentage-of-Completion: Percentage-of-Completion: StepsSteps
SUMMARY OF REVENUE RECOGNITION BASES
Recognition Basis Criteria for Use Reason of Departing from Sale Basis
Percentage of Completion Method
Long term construction of property, and reliable estimates and information about the project.
Better measure of periodic income, and revenues and costs.
Completed Contract Method Use on short term contracts, when percentage of completion method is not used
Percentage of Completion Method is not applicable
Completion of Production Basis Immediate marketability at quoted prices, unit interchangeability and etc
Determinable revenues, but inability to determine the cost, thereby defer expense
Installment-sales method and cost recovery method
Absence of reasonable basis for estimating degree of collectibility and cost of collection.
Collectibility of receivable is so uncertain, gross profit is recognized until cash is received
Deposit Method Cash is received before the sales transaction completed
Not sufficient transfer of the risks and ownership