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Revenue Recognition – A Comprehensive Analysis

In order to uniform the accounting methods theInstitute of Chartered Accountant of India has prescribed the Indian Accounting Standard which has to be adopted by every entity to be compliant with various governments regulatory. In every business, the source of income is very important to know the accumulation of income. There is a specific Indian Accounting Standard i.e. IND-AS18, concerned with the recognition of revenue arising in the Ordinary Course of the business.

IND-AS 18 Revenue Recognition issued by ICAI

“Revenue is the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity when those inflows result in increases in equity, other than increases relating to contributions from equity participants.”

“Fair value” is the amount for which an asset could be exchanged or the liability settled between the knowledgeable, willing parties in an arm’s length transaction.

What is Revenue Recognition?

As per IND-AS 18, Recognition is the process of determining the revenue from the business. The revenue can be recognized:

• When it is earned and
• When it is realized or realizable

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When the revenue is to be recognized?

In this Standard i.e. IND-AS 18 recognition, criteria are applied to separate the transaction. For example when the selling price of a product includes the other amount of service then the amount is deferred and recognized as revenue over the period when the service is performed.

Let’s understand the effect of a series of transaction, recognition criteria be applied on two or more transactions at the same time.

Sale of Goods

Revenue from the sale of goods can only be taken into consideration if the following conditions are fulfilled.

• The goods have been transferred or delivered to the buyer with significant risk and reward of ownership of goods.
• The entity retains neither managerial involvement or the control.
• The amount of revenue measured reliably.
• Economic benefits are involved with the transaction.
• The cost incurred or to be incurred with the transaction should be considered.

Yes, Mr. A can recognize the revenue in its book of accounts.

Rendering of Services

The sale of a product involves the rendering of the service can be estimated reliably, the revenue generated at the time of completion of the transaction through rendering the services can only be considered if the following conditions are fulfilled.

• The amount of revenue measured reliably.
• Economic benefits are involved with the transaction.
• The cost incurred or to be incurred with the transaction should be considered.
• The stage of completion of the transaction can be measured.

The stage of completion of the transaction may be determined by a variety of methods depending upon the nature of the transaction.

• Surveys of work performed.
• Services provided to date as a percentage of total services to be provided.
• The proportion of costs that are incurred to date bear to the estimated total cost of the transaction.

In this case, Mr. X would recognize the sale of Rs. 2,00,000 should be considered and Rs. 50,000 would recognize after 2 years when the service is delivered.

Interest, Royalties, and Dividends

To recognize the revenue related to Interest, Royalties and dividends, the following conditions to be fulfilled.

• Economic benefits are involved with the transaction.
• The amount of revenue measured reliably.

Revenue shall be recognized on the following basis:

• Interest shall be recognized, as per the interest method mentioned in Indian Accounting Standard 39.
• Royalties shall be recognized on an accrual basis depending upon the nature of the agreement.
• The dividend shall be recognized when the shareholder’s right to receive the payment is established.

As per IND-AS 18, dividends from investment in shares shall be recognized when the shareholder’s right to receive payment is established.  In the above example, the dividend is proposed on 5^th May 2017 and it was declared on 12^th August 2017. The Right to receive the payment is established on 12^th August 2017. So income from dividend must be recognized by Z ltd for the year ended on 31^st March 2018.

Disclosure:

The entity shall disclose the following as per the IND-AS 18:

1. The accounting policies to be adopted as per IND-AS 18, including the methods adopted to determine the stage of completion of transactions involving the services provided.
2. To categorize the amount of revenue  generated from the significant category including the revenue arising from:
   1. Sale of Goods
   2. Rendering of Services
   3. Interest, Royalties, and Dividend
3. The amount of revenue arising from the exchange of goods or services.

Comparison between IND-AS 18 and AS 9

Sr. No.	IND-AS 18 (Revenue Recognition)	AS 9 (Revenue Recognition)
1.	Revenue is the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity when those inflows result in increases in equity, other than increases relating to contributions from equity participants.	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 & from various other sources like interest, royalties & dividends.
2.	Revenue to be recognized at the nominal value of the consideration received or receivable.	Revenue to be recognized at the fair value of the consideration received or receivable.
3.	Interest to be recognized using the effective interest rate method.	Time proportion is considered for interest recognition.
4.	More disclosure is required.	Not detailed disclosure required as compared to IND-As 18.
5.	Percentage of completion method for revenue recognition for the rendering of service.	Permits the use of completed service contract method.

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Conclusion:

For every entity falling under the criteria of Indian Accounting Standard need to disclose the information as prescribed under IND-AS 18 and recognize the revenue accordingly.