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ACCOUNTING STANDARD 9 - REVENUE RECOGNITION

CONTENTS

ACCOUNTING STANDARD 9 - REVENUE RECOGNITION.. 1

IDENTIFICATION OF STAGE AT WHICH REVENUE TO BE RECOGNISED:. 1

RECOGNITION OF REVENUE IN CASE OF BUSINESS OF TRADING IN GOLD:. 1

RECOGNITION OF REVENUE IN CASE OF INCREASE IN SALE PRICE ON RETROSPECTIVE BASIS:. 2

RECOGNITION OF INTEREST AND ROYALTIES:. 2

RECOGNITION OF CLAIM LODGED FOR LOSS OF GOODS:. 2

RECOGNITION OF INTEREST ON DELAYED PAYMENTS:. 2

 

 

IDENTIFICATION OF STAGE AT WHICH REVENUE TO BE RECOGNISED:

 

The stages of production and sale of a producer are as follows (all in Rupees):

 

Stage

Activity

Costs to Date

Net Realizable Value

A

B

C

D

E

F

G

H

Raw Materials

WIP 1

WIP 2

Finished Product

Ready for Sale

Sale Agreed Delivered

Delivered

Paid For

10,000

12,000

15,000

17,000

17,000

17,000

18,000

18,000

8,000

13,000

19,000

30,000

30,000

30,000

30,000

30,000

 

State and explain the stage at which you think revenue will be recognized and how much would be gross profit and net profit on a unit of this product?

 

Solution

 

According to AS 9, sales will be recognized only following two conditions are satisfied:

       i.        The sale value is fixed and determinable.

      ii.        Property of the goods is transferred to the customer.

Both these conditions are satisfied only at Stage F when sales are agreed upon at a price and goods allocated for delivery purpose.

 

Gross Profit will be determined at Stage E, when goods are ready for sale after all necessary process for production is over i.e. Rs. 13,000 (30,000 - 17,000).

 

Net Profit will be determined at Stage H, when goods are delivered and payment collected i.e. Rs. 12,000 (30,000 - 18,000).

 


 

RECOGNITION OF REVENUE IN CASE OF BUSINESS OF TRADING IN GOLD:

 

A public sector company is trading gold in India for its customers, after purchasing gold the price of gold is fixed within 120 days as per rules and regulations of Indian Bullion Market by the customer. At the close of year, price of some gold was not fixed on March 31, 2012. The details are given below:

 

Quantity of Gold = 10,000 TT Bars

Gold Rate as on March 31, 2012 = Rs. 275 per TT Bar

Gold Rate was fixed on June 26, 2012 before the finalization of accounts of company = Rs. 273 per TT Bar

 

Calculate the amount of sales regarding 10,000 TT Bars to be booked in the company's account for the year ended March 31, 2012.

 

Solution

 

We need to refer to AS 5 along with AS 9 in this case, since gold is an item which has ready market hence they should be valued at the market price. So, as event occurring after the balance sheet date, the price of gold is fixed at Rs. 273 per TT Bar, gold will be valued at that rate.

 

 

RECOGNITION OF REVENUE IN CASE OF INCREASE IN SALE PRICE ON RETROSPECTIVE BASIS:

 

The Board of Directors of Swastik Ltd. decided on 31.3.2012 to increase the sale price of certain items retrospectively from 1st January, 2012. In view of this price revision with effect from 1st January 2012, the company has to receive Rs. 15 lakhs from its customers in respect of sales made from 1st January, 2012 to 31st March, 201 and the Accountant cannot make up his mind whether to include Rs. 15 lakhs in the sales for 2011-2012.

 

Solution

 

Price revision was effected during the current accounting period 2011-2012. As a result, the company stands to receive Rs. 15 lakhs from its customers in respect of sales made from 1st January, 2012 to 31st March, 2012. If the company is able to assess the ultimate collection with reasonable certainty, then additional revenue arising out of the said price revision may be recognised in 2011-2012 vide Para 10 of AS 9.

 

RECOGNITION OF INTEREST AND ROYALTIES:

 

Yes Co. Ltd., used certain resources of Naive Co. Ltd. In return Naive Co. Ltd. received Rs. 10 lakhs and Rs. 15 lakhs as interest and royalties respective from Yes Co. Ltd. during the year 2011-12. You are required to state whether and on what basis these revenues can be recognised by Naive Co. Ltd.

 

Solution

 

As per para 13 of AS 9 on Revenue Recognition, revenue arising from the use by others of enterprise resources yielding interest and royalties 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.

 

 

RECOGNITION OF CLAIM LODGED FOR LOSS OF GOODS:

 

A claim lodged with the Railways in March, 2010 for loss of goods of Rs. 2,00,000 had been passed for payment in March, 2012 for Rs. 1,50,000. No entry was passed in the books of the Company, when the claim was lodged. Advise Pinnacle Co. Ltd. about the treatment of the following in the Final Statement of Accounts for the year ended 31st March, 2012.

 

Solution:

 

Prudence suggests non-consideration of claim as an asset in anticipation. So receipt of claims is generally recognised on cash basis. Para 9.2 of AS 9 on Revenue Recognition states that where the ability to assess the ultimate collection with reasonable certainty is lacking at the time of raising any claim, revenue recognition is postponed to the extent of uncertainty involved. Para 9.5 of AS 9 states that 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. In this case it may be assumed that collectability of claim was not certain in the earlier periods. This is supposed from the fact that only Rs. 1,50,000 were collected against a claim of Rs. 2,00,000. So this transaction can not be taken as a Prior Period Item. In the light of revised AS 5, it will not be treated as extraordinary item. However, para 12 of AS 5 (Revised) states that when items of income and expense within profit or loss from ordinary activities are of such size, nature, or incidence that their disclosure is relevant to explain the performance of the enterprise for the period, the nature and amount of such items should be disclosed separately. Accordingly, the nature and amount of this item should be disclosed separately as per para 12 of AS 5 (Revised).

 

RECOGNITION OF INTEREST ON DELAYED PAYMENTS:

 

Seasons Ltd., sells agriculture products to dealers. One of the condition of sale is that interest is payable at the rate of 2% p.m., for delayed payments. Percentage of interest recovery is only 10% on such overdue outstanding due to various reasons. During the year 2011-2012 the company wants to recognise the entire interest receivable. Do you agree?

 

Solution

 

As per para 9.2 of AS 9 on Revenue Recognition, 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 installments. Thus, SCL Ltd. cannot recognize the interest amount unless the company actually receives it. 10% rate of recovery on overdue outstandings is also an estimate and is not certain. Hence, the company is advised to recognise interest receivable only on receipt basis.