Duration: 120

mins
Slides: 14

LMT SCHOOL OF MANAGEMENT, THAPAR

UNIVERSITY
Masters of Business Administration

Course: Financial Reporting and Analysis

Faculty: Dr. Sonia Garg (Email:
sonia.garg@thapar.edu)

Session 9 and 10: Revenue Recognition

AS-9 weblink
Deals with

Does not deal with

Timing of revenue
recognition of revenue in
the form of
the sale of goods
the rendering of services
the use by others of
enterprise resources
yielding
Interest
Royalties
dividends
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Revenue arising from

construction contracts
hire-purchase, lease
agreements
government grants
and other similar
subsidies
insurance contracts for
insurance companies

Revenue Recognition

What is not revenue

1. 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
2. Unrealised holding gains resulting from the change in value of current
assets, and the natural increases in herds and agricultural and forest
Products
3. Realised or unrealised gains resulting from changes in foreign
exchange rates and adjustments arising on the translation of foreign
currency financial statements
4. Realised gains resulting from the discharge of an obligation at less
than its carrying amount
5. Unrealised gains resulting from the restatement of the carrying
amount of an obligation
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Revenue Recognition

Definitions
Revenue
gross inflow of cash, receivables or other consideration
arising in the course of the 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, royalties and dividends
measured by the charges made to customers or clients
In an agency relationship, the revenue is the amount of commission and not
the gross inflow of cash, receivables or other consideration.
Completed service contract method
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
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.
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Revenue Recognition

Revenue Recognition
Sale of goods
When risk and rewards are transferred
Exception: under forward contract/government guarantee with
negligible risk of failure to sell
Rendering of services
Proportionate completion method when service consists of more than
one act. Recognition may be straight line or dependent on pattern of
performance.
Completed service contract method when service consists of a single
act or when final act is very significant.
Interest on time basis dependent on amount outstanding and
applicable rates
Royalties as per the relevant agreement
Dividends only after right to receive payment is established
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Revenue Recognition

Uncertainty in revenue
recognition
Recognise revenue only if ultimate collection
reasonably certain
If not reasonably certain postpone recognition till
it becomes reasonably certain
If uncertainty arises after sale provide for it (e.g.
bad debts)
Recognise revenue when it is reasonably
measurable, else postpone till it becomes reasonably
measurable
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Revenue Recognition

Disclose the circumstances in which revenue

Examples
Delivery is delayed at buyer s request and buyer takes title and accepts billing
Delivered subject to conditions
installation and inspection i.e. goods are sold subject to installation, inspection etc.
on approval
guaranteed sales i.e. delivery is made giving the buyer an unlimited right of return
consignment sales i.e. a delivery is made whereby the recipient undertakes to sell the goods on
behalf of the consignor
cash on delivery sales

Sales where the purchaser makes a series of installment payments to the seller, and
the seller delivers the goods only when the final payment is received
Special order and shipments i.e. where payment (or partial payment) is received for
goods not presently held in stock e.g. the stock is still to be manufactured or is to be
delivered directly to the customer from a third party
Sale/repurchase agreements i.e. where seller concurrently agrees to repurchase the
same goods at a later date
Sales to intermediate parties i.e. where goods are sold to distributors, dealers or
others for resale
Subscriptions for publications
Installment sales
Trade discounts and volume rebates
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Revenue Recognition

More Examples
Installation Fees
Advertising and insurance agency
commissions
Financial service commissions
Admission fees
Tuition fees
Entrance and membership fees
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Revenue Recognition

Problems

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Revenue Recognition

Problem 5-3
To record the write-off:
If Alcom uses the direct write-off method
DrBad Debt Expense $3000
CrAccounts Receivable $3000
If Alcom uses the allowance method
DrAllowance for Doubtful Debts $3000
CrAccounts Receivable $3000
To record the partial payment:
If Alcom uses the direct write-off method
DrCash $950
CrBad Debt Expense $950
If Alcom uses the allowance method
DrCash $950
CrAllowance for Doubtful Debts $950
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Revenue Recognition

10

Problem 5-4
The allowance for doubtful accounts should have a balance of
$51,750 on December 31 as per calculations shown below:
Days Account
Outstanding
0-15 days

Amount

Expected %
Uncollectible

Estimated
Uncollectible

$450,000

0.01

$4,500

16-30 days

150,000

0.06

9,000

31-45 days

75,000

0.20

46-60 days

45,000

0.35

61-75 days

15,000

0.50

> 75 days

15,000

1.00

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Revenue Recognition

Doubtfu
l Debts

15,000
15,750
7,500

Bad
Debts

15,000

11

Problem 5-5
Green Lawns books

Note that at this point the $12,600 wholesale price (Green

Lawns revenue when these goods are sold) is irrelevant.
Carsons books: No entry; the goods are not owned by Carson
and hence are not inventory on Carsons books; similarly,
Carson does not as yet owe Green Lawn for these goods.
After sale, Green Lawns books:

Carsons books:

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Revenue Recognition

12

Problem 5-6

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Revenue Recognition

13

IFRS Converged IND AS-18 v/s

Existing AS-9
1. As per AS-18 Revenue has to recorded at fair value and not
nominal value. For example if a firm allows sale of goods on
interest free credit with a note receivable, the fair value is less
than nominal value
2. AS-18 additionally requires the revenue to be recognised only
when it is probable that economic benefits associated with the
transaction will flow to the entity and costs incurred in respect of
the transaction can be measured reliably
3. As per AS-18 only percentage of completion method can be
used for rendering of services
4. As per AS-18 requires use of Effective Interest Rate Method
and not time basis for recognising revenue from interest
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Revenue Recognition

14