Presentation on Accounting Standard 9

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, and
when it is realized or realizable
Revenue is earned when the earnings process is
substantially complete
Revenue is realized when goods and services
are exchanged for cash or claims to cash
Revenue 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 TransactionsFour Types of Revenue Transactions

REVENUE RECOGNITION AT POINT OFREVENUE RECOGNITION AT POINT OF
SALESALE
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.

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;

Revenues from manufacturing and selling
are commonly recognized at point of sale
Exceptions:
1. Sales with buyback agreements
2. Sales when right of return exists (high rates that are not
reliably estimable)
3. Trade loading/channel stuffing
Revenue Recognition at Point of SaleRevenue Recognition at Point of Sale

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 DeliveryRevenue Recognition After Delivery

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 MethodThe Installment Sales Method

 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

 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 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.

 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.

 Installation Fees
 Advertising and insurance agency commissions
 Financial service commissions
 Admission fees
 Tuition fees
 Entrance and membership fees

 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 example
Two methods available are :
 The percentage-of-completion method, and
 The completed contract method
Revenue Recognition Before DeliveryRevenue Recognition Before Delivery

Long-Term Construction
Accounting Methods
1) Terms of contract must
be certain, enforceable
2) Certainty of performance
by both parties
3) 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-Completion
Method
Completed Contract
Method
Revenue Recognition Before DeliveryRevenue Recognition Before Delivery

Costs incurred to date = Percent complete
Most 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: StepsPercentage-of-Completion: Steps

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

Presentation on Accounting Standard 9

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