Professional Documents
Culture Documents
REVENUE RECOGNITION
- Vishnu Sahu
What is Revenue
Gross inflow of consideration (cash / receivables / others)
arising in the course of ordinary business activities from:
Sale of goods
Rendering of services and
Use of enterprise resources yielding interest, royalties and
dividends
Revenue Recognition
Recognition is the process of recording and reporting an
item as an element of financial statements
Sale of Goods
Rendering of Services
Use of Enterprise’s assets
Disposal of assets (other than inventory)
AS-9 does not deal with….
Revenue arising from construction contracts (AS-7)
Measurement:
Should we recognize entire revenue at the same
time or in parts
Revenue Recognition Classified by
Nature of Transaction
Sale of Goods
Delivery is delayed at buyer’s request and buyer takes title and
accepts billing
Installment Sale and the seller delivers the goods only when
the final payment is received
Sale of Goods
Special order and shipments (i.e. where payment is received
for goods not presently held in stock)
Installment sales
Admission fees
Tuition fees
Transactions
Installment Sales
Installment Method
Cost Recovery Method
Barter Transactions
Percentage of Completion Method
Appropriate when the project’s cost and revenue can be
reliably estimated
To Find:
Revenue and Net Income (Profit) to be recognized each year
in the company’s Income Statement
Percentage of Completion
Method: Example
2005 2006 2007
Solution:
To Find:
Expenses, Revenue and Net Income to be recognized each year
To Find:
Expenses, Revenue and Net Income to be recognized each year
in the company’s Income Statement
Installment Sales Method:
Example
Profit: 1,000 – 800 = 200
Profit %: 200 = 20%
1,000
Solution:
Very conservative
Cost Recovery Method:
Example
Data: Contract price: $1,000 Estimated cost: $800
Start date: Jan, 05 Finish: Dec, 07
Balance Sheet date: Dec. 31
To Find:
Expenses, Revenue and Net Income to be recognized each year
Round-trip transaction
Involves the sale of goods to one party with the
simultaneous purchase of identical goods from the
same party
E.g. Internet cos. buy advertising space on each
other’s website
Common ways of Manipulating
Revenue
Objectives of manipulating revenues:
Overstatement of revenues: To boost company
valuations
Understatement of revenues: To save on tax, thereby
increasing savings
3 common ways…....
Fraudulent reporting of fictitious sales
Dec 24th deadline for sales, i.e., before the closing of ‘93 books
Distributors will not have to pay unless the lenses were sold