Introduction
1.
This Statement deals with the bases for
recognition of revenue in the statement of profit and loss of an enterprise.
The Statement is concerned with the recognition of revenue arising in the
course of the ordinary activities of the enterprise from
§ the
sale of goods,
§ the
rendering of services, and
§ the
use by others of enterprise resources yielding interest, royalties and
dividends.
2.
This Statement does not deal with the
following aspects of revenue recognition to which special considerations apply:
(i)
Revenue arising from construction contracts;
(ii)
Revenue arising from hire-purchase,
lease agreements;
(iii)
Revenue arising from government grants
and other similar subsidies;
(iv)
Revenue of insurance companies arising
from insurance contracts.
3.
Examples of items not included within
the definition of "revenue" for the purpose of this Statement are:
(i)
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;
(ii)
Unrealised holding gains resulting from
the change in value of current assets, and the natural increases in herds and
agricultural and forest products;
(iii)
Realised or unrealised gains resulting
from changes in foreign exchange rates and adjustments arising on the
translation of foreign currency financial statements;
(iv)
Realised gains resulting from the
discharge of an obligation at less than its carrying amount;
(v)
Unrealised gains resulting from the
restatement of the carrying amount of an obligation.
Definitions
4.
The following terms are used in this
Statement with the meanings specified:
4.1
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,
from the rendering of services, and from the use by others of enterprise
resources yielding interest, royalties and dividends. Revenue is measured by
the charges made to customers or clients for goods supplied and services
rendered to them and by the charges and rewards arising from the use of
resources by them. In an agency relationship, the revenue is the amount of
commission and not the gross inflow of cash, receivables or other
consideration.
4.2
Completed
service contract method is 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.
4.3
Proportionate
completion method is 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.
Explanation
5.
Revenue recognition is mainly concerned
with the timing of recognition of revenue in the statement of profit and loss
of an enterprise. The amount of revenue arising on a transaction is usually
determined by agreement between the parties involved in the transaction. When
uncertainties exist regarding the determination of the amount, or its
associated costs, these uncertainties may influence the timing of revenue
recognition.
6. Sale
6.1
A key criterion for determining when to
recognise revenue from a transaction involving the sale of goods is that the
seller has transferred the property in the goods to the buyer for a
consideration. The transfer of property in goods, in most cases, results in or
coincides with the transfer of significant risks and rewards of ownership to
the buyer. However, there may be situations where transfer of property in goods
does not coincide with the transfer of significant risks and rewards of
ownership. Revenue in such situations is recognised at the time of transfer of
significant risks and rewards of ownership to the buyer. Such cases may arise
where delivery has been delayed through the fault of either the buyer or the
seller and the goods are at the risk of the party at fault as regards any loss
which might not have occurred but for such fault. Further, sometimes the
parties may agree that the risk will pass at a time different from the time
when ownership passes.
6.2
At certain stages in specific industries,
such as when agricultural crops have been harvested or mineral ores have been
extracted, performance may be substantially complete prior to the execution of
the transaction generating revenue. In such cases when sale is assured under a
forward contract or a government guarantee or where market exists and there is
a negligible risk of failure to sell, the goods involved are often valued at
net realisable value. Such amounts, while not revenue as defined in this
Statement, are sometimes recognised in the statement of profit and loss and
appropriately described.
7. Rendering
of Services
7.1
Revenue from service transactions is
usually recognised as the service is performed, either by the proportionate
completion method or by the completed service contract method.
(i)
Proportionate
completion method—Performance consists of the execution of more than one
act. Revenue is recognised proportionately by reference to the performance of
each act. The revenue recognised under this method would be determined on the
basis of contract value, associated costs, number of acts or other suitable
basis. For practical purposes, when services are provided by an indeterminate
number of acts over a specific period of time, revenue is recognised on a
straight line basis over the specific period unless there is evidence that some
other method better represents the pattern of performance.
(ii)
Completed
service contract method—Performance consists of the execution of a single
act. Alternatively, services are performed in more than a single act, and the
services yet to be performed are so significant in relation to the transaction
taken as a whole that performance cannot be deemed to have been completed until
the execution of those acts. The completed service contract method is relevant
to these patterns of performance and accordingly revenue is recognised when the
sole or final act takes place and the service becomes chargeable.
Read Notes on accounting standard 9
Read Notes on accounting standard 9
8. The
Use by Others of Enterprise
8.1
The use by others of such enterprise
resources gives rise to:
(i)
interest—charges for the use of cash
resources or amounts due to the enterprise;
(ii)
royalties—charges for the use of such
assets as know-how, patents, trade marks and copyrights;
(iii)
dividends—rewards from the
holding of investments in shares.
8.2
Interest accrues, in most circumstances,
on the time basis determined by the amount outstanding and the rate applicable.
Usually, discount or premium on debt securities held is treated as though it
were accruing over the period to maturity.
8.3
Royalties accrue in accordance with the
terms of the relevant agreement and are usually recognised on that basis
unless, having regard to the substance of the transactions, it is more
appropriate to recognise revenue on some other systematic and rational basis.
8.4
Dividends from investments in shares are
not recognised in the statement of profit and loss until a right to receive
payment is established.
8.5
When interest, royalties and dividends
from foreign countries require exchange permission and uncertainty in
remittance is anticipated, revenue recognition may need to be postponed.
9. Effect
of Uncertainties on Revenue Recognition
9.1
Recognition of revenue requires that
revenue is measurable and that at the time of sale or the rendering of the
service it would not be unreasonable to expect ultimate collection.
9.2
Where the ability to assess the ultimate
collection with reasonable certainty is lacking at the time of raising any
claim, e.g., for escalation of price, export incentives, interest etc., revenue
recognition is postponed to the extent of uncertainty involved. In such cases,
it may be appropriate to recognise revenue only when it is reasonably certain
that the ultimate collection will be made. Where there is no uncertainty as to
ultimate collection, revenue is recognised at the time of sale or rendering of
service even though payments are made by instalments.
9.3
When the uncertainty relating to
collectability arises subsequent to the time of sale or the rendering of the
service, it is more appropriate to make a separate provision to reflect the
uncertainty rather than to adjust the amount of revenue originally recorded.
9.4
An essential criterion for the
recognition of revenue is that the consideration receivable for the sale of
goods, the rendering of services or from the use by others of enterprise
resources is reasonably determinable. When such consideration is not
determinable within reasonable limits, the recognition of revenue is postponed.
9.5 When
recognition of revenue is postponed due to the effect of uncertainties, it is
considered as revenue of the period in which it is properly recognised.
10.
Revenue from sales or service
transactions should be recognised when the requirements as to performance set
out in paragraphs 11 and 12 are satisfied, provided that at the time of
performance it is not unreasonable to expect ultimate collection. If at the
time of raising of any claim it is unreasonable to expect ultimate collection,
revenue recognition should be postponed.
11.
In a transaction involving the sale of
goods, performance should be regarded as being achieved when the following
conditions have been fulfilled:
(i) the seller of goods has transferred to the
buyer the property in the goods for a price or all significant risks and
rewards of ownership have been transferred to the buyer and the seller retains
no effective control of the goods transferred to a degree usually associated
with ownership; and
(ii)
no significant uncertainty exists
regarding the amount of the consideration that will be derived from the sale of
the goods.
12.
In a transaction involving the rendering
of services, performance should be measured either under the completed service contract
method or under the proportionate completion method, whichever relates the
revenue to the work accomplished. Such performance should be regarded as being
achieved when no significant uncertainty exists regarding the amount of the
consideration that will be derived from rendering the service.
13.
Revenue arising from the use by others of
enterprise resources yielding interest, royalties and dividends should only be
recognised when no significant uncertainty as to measurability or
collectability exists. These revenues are recognised on the following bases:
(i)
Interest
|
:
|
on a time
proportion basis taking into account the amount outstanding and the rate
applicable. |
(ii)
Royalties
|
:
|
on an accrual
basis in accordance with the terms of the relevant agreement. |
(iii) Dividends
from investments in shares
|
:
|
when the owner's
right to receive payment is established. |
Disclosure
14.
In addition to the disclosures required
by Accounting Standard 1 on 'Disclosure of Accounting Policies' (AS 1), an
enterprise should also disclose the circumstances in which revenue recognition
has been postponed pending the resolution of significant uncertainties.