session 9,10

14
LMT SCHOOL OF MANAGEMENT, THAPAR UNIVERSITY Masters of Business Administration Course: Financial Reporting and Analysis Faculty: Dr. Sonia Garg (Email: [email protected]) Session 9 and 10: Revenue Recognition Duration: 120 mins Slides: 14

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Page 1: Session 9,10

LMT SCHOOL OF MANAGEMENT, THAPAR UNIVERSITYMasters of Business Administration

Course: Financial Reporting and AnalysisFaculty: Dr. Sonia Garg (Email: [email protected])

Session 9 and 10: Revenue Recognition

Duration: 120 minsSlides: 14

Page 2: Session 9,10

21/04/2023 Revenue Recognition 2

AS-9 weblink

Deals withTiming 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

Does not deal withRevenue arising from • construction contracts• hire-purchase, lease

agreements• government grants and

other similar subsidies• insurance contracts for

insurance companies

Page 3: Session 9,10

21/04/2023 Revenue Recognition 3

What is not revenue1. 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

Page 4: Session 9,10

21/04/2023 Revenue Recognition 4

DefinitionsRevenue• 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.

Page 5: Session 9,10

21/04/2023 Revenue Recognition 5

Revenue RecognitionSale 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 agreementDividends only after right to receive payment is established

Page 6: Session 9,10

21/04/2023 Revenue Recognition 6

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

• Disclose the circumstances in which revenue recognition is postponed

Page 7: Session 9,10

21/04/2023 Revenue Recognition 7

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

Page 8: Session 9,10

21/04/2023 Revenue Recognition 8

More Examples

• Installation Fees• Advertising and insurance agency

commissions• Financial service commissions• Admission fees• Tuition fees• Entrance and membership fees

Page 9: Session 9,10

21/04/2023 Revenue Recognition 9

Problems

Page 10: Session 9,10

21/04/2023 Revenue Recognition 10

Problem 5-3To record the write-off:If Alcom uses the direct write-off method Dr…Bad Debt Expense $3000 Cr…Accounts Receivable $3000If Alcom uses the allowance method Dr…Allowance for Doubtful Debts $3000 Cr…Accounts Receivable $3000

To record the partial payment:If Alcom uses the direct write-off method Dr…Cash $950 Cr…Bad Debt Expense $950If Alcom uses the allowance method Dr…Cash $950 Cr…Allowance for Doubtful Debts $950

Page 11: Session 9,10

21/04/2023 Revenue Recognition 11

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

Days’ Account Outstanding

Amount Expected % Uncollectible

Estimated Uncollectible

0-15 days $450,000 0.01 $4,50016-30 days 150,000 0.06 9,00031-45 days 75,000 0.20 15,00046-60 days 45,000 0.35 15,75061-75 days 15,000 0.50 7,500> 75 days 15,000 1.00 15,000

Doubtful Debts

Bad Debts

Page 12: Session 9,10

21/04/2023 Revenue Recognition 12

Problem 5-5Green Lawn’s books

Note that at this point the $12,600 wholesale price (Green Lawn’s revenue when these goods are sold) is irrelevant.Carson’s books: No entry; the goods are not owned by Carson and hence are not inventory on Carson’s books; similarly, Carson does not as yet owe Green Lawn for these goods.

After sale, Green Lawn’s books:

Carson’s books:

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21/04/2023 Revenue Recognition 13

Problem 5-6

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21/04/2023 Revenue Recognition 14

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