{"id":22813,"date":"2019-08-09T19:51:12","date_gmt":"2019-08-09T14:21:12","guid":{"rendered":"https:\/\/enterslice.com\/learning\/?p=22813"},"modified":"2019-08-13T12:05:36","modified_gmt":"2019-08-13T06:35:36","slug":"revenue-recognition-comprehensive-analysis","status":"publish","type":"post","link":"https:\/\/enterslice.com\/learning\/revenue-recognition-comprehensive-analysis\/","title":{"rendered":"Revenue Recognition &#8211; A Comprehensive Analysis"},"content":{"rendered":"<p>In order to uniform the <a class=\"glossaryLink\"  aria-describedby=\"tt\"  data-cmtooltip=\"&lt;div class=glossaryItemTitle&gt;Accounting&lt;\/div&gt;&lt;div class=glossaryItemBody&gt;Accounting is the language of business, serving as the backbone of financial management and decision-making. It involves the systematic recording, analysis, and reporting of financial(...)&lt;\/div&gt;\"  href=\"https:\/\/enterslice.com\/learning\/terms\/accounting\/\"  data-gt-translate-attributes='[{\"attribute\":\"data-cmtooltip\", \"format\":\"html\"}]'>accounting<\/a> 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 <a class=\"glossaryLink\"  aria-describedby=\"tt\"  data-cmtooltip=\"&lt;div class=glossaryItemTitle&gt;Accumulation&lt;\/div&gt;&lt;div class=glossaryItemBody&gt;Accumulation refers to the gradual increase or gathering of something over a period of time. In finance, it often pertains to the incremental growth of asset value or portfolio through multiple(...)&lt;\/div&gt;\"  href=\"https:\/\/enterslice.com\/learning\/terms\/accumulation\/\"  data-gt-translate-attributes='[{\"attribute\":\"data-cmtooltip\", \"format\":\"html\"}]'>accumulation<\/a> of income. There is a specific Indian Accounting Standard i.e. <a href=\"https:\/\/enterslice.com\/learning\/applicability-of-indian-accounting-standards\/\"><strong>IND-AS18<\/strong><\/a>, concerned with the recognition of revenue arising in the Ordinary Course of the business.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>IND-AS 18\nRevenue Recognition issued by ICAI <\/strong><\/h3>\n\n\n\n<p>&ldquo;Revenue is the gross inflow of economic benefits\nduring the period arising in the course of the ordinary activities of an entity\nwhen those inflows result in increases in equity, other than increases relating\nto contributions from equity participants.&rdquo;<\/p>\n\n\n\n<div class=\"shadow2\"><strong>Notes: Revenue is to be measured at Fair Value of the Consideration received or receivable.<\/strong>&#65279;<\/div>\n\n\n\n<p>&ldquo;Fair value&rdquo; is the\namount for which an asset could be exchanged or the liability settled between\nthe knowledgeable, willing parties in an arm&rsquo;s length transaction. <\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>What is\nRevenue Recognition?<\/strong><\/h3>\n\n\n\n<p>As per IND-AS 18, Recognition is the process of determining the revenue from the business. The revenue can be recognized:<\/p>\n\n\n\n<ul><li>When it is earned and<\/li><li>When it is realized or realizable<\/li><\/ul>\n\n\n\n<p><\/p><h3><b>Also, Read:<\/b> <mark style=\"background: #fffd03 !important;\"><a href=\"https:\/\/enterslice.com\/learning\/challenges-housing-finance-company\/\">The Major Challenges Faced by Housing Finance Company in India<\/a><\/mark><\/h3>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>When the revenue is to be recognized?<\/strong><\/h3>\n\n\n\n<p>In this Standard i.e. IND-AS 18 recognition,\ncriteria are applied to separate the transaction. For example when the selling\nprice of a product includes the other amount of service then the amount is deferred\nand recognized as revenue over the period when the service is performed.<\/p>\n\n\n\n<p>Let&rsquo;s understand the effect of a series of\ntransaction, recognition criteria be applied on two or more transactions at the\nsame time.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>Sale of Goods<\/strong><\/h3>\n\n\n\n<p>Revenue from the sale of goods can only be taken into\nconsideration if the following conditions are fulfilled.<\/p>\n\n\n\n<ul><li>The goods have\nbeen transferred or delivered to the buyer with significant risk and reward of\nownership of goods.<\/li><li>The entity\nretains neither managerial involvement or the control.<\/li><li>The amount of revenue\nmeasured reliably.<\/li><li>Economic\nbenefits are involved with the transaction.<\/li><li>The cost\nincurred or to be incurred with the transaction should be considered.<\/li><\/ul>\n\n\n\n<div class=\"shadow2\"><strong>For Example Mr. A proprietor selling the product to Mr. B. Can Mr. A recognize the revenue generated in its book as soon as the goods dispatch the goods to Mr. B?<\/strong>&#65279;<\/div>\n\n\n\n<p>Yes, Mr. A can recognize the revenue in its book of\naccounts.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><strong>Rendering of Services<\/strong><\/h4>\n\n\n\n<p>The sale of a product involves the rendering of the\nservice can be estimated reliably, the revenue generated at the time of\ncompletion of the transaction through rendering the services can only be\nconsidered if the following conditions are fulfilled.<\/p>\n\n\n\n<ul><li>The amount of\nrevenue measured reliably.<\/li><li>Economic\nbenefits are involved with the transaction.<\/li><li>The cost\nincurred or to be incurred with the transaction should be considered.<\/li><li>The stage of\ncompletion of the transaction can be measured.<\/li><\/ul>\n\n\n\n<p>The stage of completion of the transaction may be\ndetermined by a variety of methods depending upon the nature of the transaction.<\/p>\n\n\n\n<ul><li>Surveys of\nwork performed.<\/li><li>Services provided\nto date as a percentage of total services to be provided.<\/li><li>The proportion\nof costs that are incurred to date bear to the estimated total cost of the\ntransaction.<\/li><\/ul>\n\n\n\n<div class=\"shadow2\"><strong>For Example, Mr. X sells the equipment to Mr. Y for Rs. 2,50,000 (actual cash price of Rs. 2,00,000) where Mr. X provides the commitment to service the equipment for the next 2 years with no additional charges.<\/strong>&#65279;<\/div>\n\n\n\n<p>In this case, Mr. X would recognize the sale of Rs.\n2,00,000 should be considered and Rs. 50,000 would recognize after 2 years when\nthe service is delivered.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>Interest, Royalties, and Dividends<\/strong><\/h3>\n\n\n\n<p>To recognize the revenue related to Interest,\nRoyalties and dividends, the following conditions to be fulfilled.<\/p>\n\n\n\n<ul><li>Economic\nbenefits are involved with the transaction.<\/li><li>The amount of\nrevenue measured reliably.<\/li><\/ul>\n\n\n\n<p><strong>Revenue shall be recognized on the following <a class=\"glossaryLink\"  aria-describedby=\"tt\"  data-cmtooltip=\"&lt;div class=glossaryItemTitle&gt;Basis&lt;\/div&gt;&lt;div class=glossaryItemBody&gt;In finance, the &amp;quot;basis&amp;quot; is a term with several applications, including representing the difference between the spot price and the future contract price of an asset, which is vital in investment(...)&lt;\/div&gt;\"  href=\"https:\/\/enterslice.com\/learning\/terms\/basis\/\"  data-gt-translate-attributes='[{\"attribute\":\"data-cmtooltip\", \"format\":\"html\"}]'>basis<\/a>:<\/strong><\/p>\n\n\n\n<ul><li>Interest shall be recognized, as per the interest method mentioned in Indian Accounting Standard 39.<\/li><li>Royalties shall be recognized on an accrual basis depending upon the nature of the agreement.<\/li><li>The dividend shall be recognized when the <a class=\"glossaryLink\"  aria-describedby=\"tt\"  data-cmtooltip=\"&lt;div class=glossaryItemTitle&gt;Shareholder&lt;\/div&gt;&lt;div class=glossaryItemBody&gt;A shareholder is an individual or entity that owns at least one share of a company&amp;#039;s stock, granting them partial ownership of the company. This status allows them certain rights, including(...)&lt;\/div&gt;\"  href=\"https:\/\/enterslice.com\/learning\/terms\/shareholder\/\"  data-gt-translate-attributes='[{\"attribute\":\"data-cmtooltip\", \"format\":\"html\"}]'>shareholder<\/a>&rsquo;s right to receive the payment is established.<\/li><\/ul>\n\n\n\n<div class=\"shadow2\"><strong>For Example, Z ltd has declared the dividend of Rs.5\/- on the face value of Rs. 10\/- each on equity shares on 12th August 2017 and the Dividend was proposed on 5th May 2017. &#65279;<\/strong>&#65279;<\/div>\n\n\n\n<p>As per IND-AS 18, dividends from investment in\nshares shall be recognized when the shareholder&rsquo;s right to receive payment is\nestablished.&nbsp; In the above example, the\ndividend is proposed on 5<sup>th<\/sup> May 2017 and it was declared on 12<sup>th<\/sup>\nAugust 2017. The Right to receive the payment is established on 12<sup>th<\/sup>\nAugust 2017. So income from dividend must be recognized by Z ltd for the year\nended on 31<sup>st<\/sup> March 2018.<\/p>\n\n\n\n<p><strong>Disclosure:<\/strong><\/p>\n\n\n\n<p><strong><em>The entity shall disclose the following as per the IND-AS 18:<\/em><\/strong><\/p>\n\n\n\n<ol><li>The <a class=\"glossaryLink\"  aria-describedby=\"tt\"  data-cmtooltip=\"&lt;div class=glossaryItemTitle&gt;Accounting Policies&lt;\/div&gt;&lt;div class=glossaryItemBody&gt;Accounting policies are regulations or guidelines that businesses must follow when creating and presenting their financial statements. They establish a consistent framework for producing(...)&lt;\/div&gt;\"  href=\"https:\/\/enterslice.com\/learning\/terms\/accounting-policies\/\"  data-gt-translate-attributes='[{\"attribute\":\"data-cmtooltip\", \"format\":\"html\"}]'>accounting policies<\/a> to be adopted as per IND-AS 18, including the methods adopted to determine the stage of completion of transactions involving the services provided.<\/li><li>To categorize the amount of revenue&nbsp; generated from the significant category including the revenue arising from:<ol><li>Sale of Goods<\/li><li>Rendering of Services<\/li><li>Interest, Royalties, and Dividend<\/li><\/ol><\/li><li>The amount of revenue arising from the exchange of goods or services.<\/li><\/ol>\n\n\n\n<p><\/p><h3><strong>Comparison between IND-AS 18 and AS 9<\/strong><\/h3>\n\n\n\n<table class=\"wp-block-table\"><tbody><tr><td>\n  <strong>Sr. No.<\/strong>\n  <\/td><td>\n  <strong>IND-AS 18 (Revenue Recognition)<\/strong>\n  <\/td><td>\n  <strong>AS 9 (Revenue Recognition)<\/strong>\n  <\/td><\/tr><tr><td>\n  <strong>1.<\/strong>\n  <\/td><td>   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.   <\/td><td>   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 &amp; from various other sources like interest, royalties &amp;   dividends.   <\/td><\/tr><tr><td>\n  <strong>2.<\/strong>\n  <\/td><td>   Revenue to be recognized at the nominal value of the consideration received or receivable.   <\/td><td>   Revenue to be recognized at the fair value of the consideration received or receivable.   <\/td><\/tr><tr><td>\n  <strong>3.<\/strong>\n  <\/td><td>   Interest to be recognized using the effective interest rate method.   <\/td><td>   Time proportion is considered for interest recognition.   <\/td><\/tr><tr><td>\n  <strong>4.<\/strong>\n  <\/td><td>   More disclosure is required.   <\/td><td>   Not detailed disclosure required as compared to IND-As 18.   <\/td><\/tr><tr><td>\n  <strong>5.<\/strong>\n  <\/td><td>   Percentage of completion method for revenue recognition for the rendering of service.   <\/td><td>   Permits the use of completed service contract method.   <\/td><\/tr><\/tbody><\/table>\n\n\n\n<h3><b>Also, Read:<\/b> <mark style=\"background: #fffd03 !important;\"><a href=\"https:\/\/enterslice.com\/learning\/housing-finance-companies\/\">Compliance of Housing Finance Companies in India<\/a><\/mark><\/h3>\n\n\n\n<p><strong>Conclusion:<\/strong><\/p>\n\n\n\n<p>For every entity falling\nunder the criteria of Indian Accounting Standard need to disclose the\ninformation as prescribed under IND-AS 18 and recognize the revenue\naccordingly.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>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 [&hellip;]<\/p>\n","protected":false},"author":4,"featured_media":22838,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[1],"tags":[2647],"acf":{"service_id":"220"},"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v14.6.1 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>What is Revenue Recognition? - A Comprehensive Analysis<\/title>\n<meta name=\"description\" content=\"Revenue recognition is an accounting principle that outlines the specific conditions under which revenue. 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