revenue recognition_2014-15.pptx

8/10/2019 Revenue Recognition_2014-15.pptx

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Measurement of Revenue

Dr.Rachappa Shette


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Issues covered

Deciding the timing of revenue

Measuring the amount of revenue in aparticular period

Measuring expenses related to revenuerecognized in a particular period.


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Operating cycle of a product:

Purchase order by customer 2008

Production of units 2009

Delivery of units to customers 2010 andcollection of cash 2010

Known post sale free service period 2011

Revenue is recognized in _________ year


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Operating cycle of product:


Advance collection from customers 2008


Delivery of units to customers 2010




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First Requirement for RevenueRecognition

Transfer of goods along with ownership,title and significant risk in case of sale ofgoods


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Sale of units to customers on credit 2010

Collection from customers in 2011




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Second Requirement for RevenueRecognition

In case of credit sales, the credit salesamount should be realizable or collectable.The risk of collection should be

insignificant.


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Sale of units to customers on credit 2010

Collection from customers in 2011

Unknown post sale free service period 2012



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Summary

Two requirements for revenue recognition:

Shipment of goods in case of sale of goods orcompletion of service in case of service

AND

Insignificant risk of realization or collection


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Revenue in case of ContructionIndustry

ABC Ltd entered into a contract with one of itsclients in 2010 to provide software servicesduring 2011 to 2015.Contract price was Rs 7.50

Cr Completed Service Contract Method

Or

Proportionate Completion Method Price is pre-determined

Cost of entire service can be reliably measured


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Measuring Expenses in case ofsale of goods

Operating cycle of product: Received order in 2008 Production of units 2009 Sale of units to customers on credit 2010

Collection from customers in 2011 Known post sale free service period 2011 and 2012In which year revenue recognised?What are the expenses incurred for the year 2010?

COGS i.e. Inventory is used for credit sales in2010

Estimated bad debts (Provision for bad debts)related to credit sales of 2010.

Estimated cost of (Provision) post sale free

service related to credit sales in 2010


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Measuring Expenses in case ofConstruction Industry

ABC Ltd entered into a contract with one of itsclients in 2010 to provide software servicesduring 2011 to 2015.Contract price was Rs 7.50Cr. The estimated cost is Rs 1 Crore in eachyear.

Completed Service Contract Method

Or

Proportionate Completion Method Price is pre-determined

Cost of entire service can be reliably measured


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Case 2:

Manufacturer A found that Afghanistan is apotential market for his product. In 2011,Amadecredit sales to a customer from Afghanistan oncredit basis for Rs 30 Cr. The amount is yet to be

collected on accounting closing date. Thecustomer financial condition is strong and he hasstrong willingness to make payment. In 2011, ithas been observed that Central Bank of

Afghanistan rejected 60% of requests for INR bylocal importers.

Does manufacturer A have revenue in 2011?Why?


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Case 3

In December 2011, Manufacturer A soldgoods to B on cash basis for Rs 4 Cr. Thedelivery is delayed at the buyers request

and buyer takes title and accepts billing.The goods will be delivered in 2012.

Does manufacturer A have revenue in

2011? Why?


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Case 5:

In 2011, Manufacturer A sold goods to Bon installment basis for Rs 5 Cr. B willmake down payment of Rs 1 Cr and

balance will be paid in four equal annualinstallments. A will release the goods to Bonly after payment of all the installments.

Does manufacturer A have revenue in2011?


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Case 6

When an electric utility customer useselectricity, the electric company hasearned revenues. It is obviously

impossible, however, for the company toread all of its customers meters on the

evening of 31 March 2012.

How does the electric company know itsrevenue for financial year 2011-12?


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Case 7

A bank sells a customer $500 of AmericanExpress travelers checks, for which the

bank collects from the customer $505.

(The bank charges a 1 per cent fee for thisservice).

How does the bank record this

transaction?


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Case 8

In Dec 2011, Manufacturer A sold goods toWholesaler B. B used this inventory as collateralfor a bank loan of Rs 10,00,000 and sent the Rs

10,00,000 to A. Manufacturer A agreed torepurchase the goods on or before 1stJuly, 2012for Rs 12,00,000.

Does Manufacturer A have revenue in 2011?

Why?

Product Repurchase Agreement.


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Case 9

Sales on barter system

Sales within the group companies etc.


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Accounting for revenue and expense atMicrosoft Corporation1990s

In case of listed companies, the general accountingpractice of manipulation is overstating the revenues andunderstating the expenses.

Microsoft Corp continuously understated its revenue andoverstated expenses.

No separate accounting standard for IT sector in 1990s

Entire industry was expected to follow the accountingpolicies of Microsoft Corp

What was the Financial Reporting Strategy of MicrosoftCorp?


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Summary

The biggest individual item

The critical part in accounting is revenue

No accounting standard covers different issues

of revenue recognition The Revenue Recognition is the most popular

scheme accounting manipulation

The users of financial statements should be

extremely careful with respect to RevenueRecognition

The users of financial statements should beextremely careful with respect to WIP in case of

construction companies.


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Readings

1.Chapter 5 from the prescribed text book

2. Accounting Standard 9http://www.icai.org/post.html?post_id=8660

3. Revenue Recognition and Reporting

(HBS)

revenue recognition_2014-15.pptx

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