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ACCOUNTING STANDARD 9: REVENUE RECOGNITION

FREQUENTLY ASKED QUESTIONS

A company manufacturing equipments against customers' orders has, at the close of the year, some finished equipments in the stock. The company is of the view that as these equipments were made for a particular customer, these should be treated as sales. The company has verified the stock on the last date and found that tags were put on some of the items of the finished stock mentioning that these have been sold to a particular party. In most of the cases, the company is also collecting advances against theses orders. Whether by putting tags of sale, can the company treat it as sales for the year though the equipment is not shipped?

Answer:

Equipments which are not shipped and on which only tags of sale have been put, cannot be treated as sales for the year even if the company has collected advance against these orders. Merely, by putting a tag the sale is not completed. The sale is completed only when the buyer accepts title and billing and the seller holds these goods in his premises on behalf of the buyer.

What should be the date of Booking Purchase of Imported Material?

Answer:

The transactions of import should be recognized when all significant risks and rewards of ownership pass on to the company provided the condition of measurability of the amount of consideration is satisfied. Accordingly, the date on which all significant risks and rewards of ownership in cases of FOB, C&F and CIF contracts are transferred should be determined keeping in view the terms and conditions are transferred should be determined keeping in view the terms and conditions of each contract.

The difference between the exchange rate as at the date of the transaction and as at the date of settlement thereof should be recognized as income or expense, or as an adjustment to the carrying amount of related fixed assets, depending on the nature of the item to which the exchange difference pertains, as per AS-11.

Many software vendors now use electronic delivery as the standard or default means of delivery. When is revenue recognized by the software vendor if software is delivered electronically to the customer?

Answer:

Generally delivery occurs when the vendor has provided the customer with reasonable ability to access the software from its server, or from the server of a third party acting as a fulfillment agent. Generally, this condition is satisfied when the customer has the access codes required to download the licensed software and the server is functional.

However, if the contractual arrangement requires the vendor to physically deliver the software or to deliver the software both electronically and physically, the ability of the customer to electronically access the software does not constitute delivery. When both means of delivery are required, the vendor must deliver the software electronically and physically for the delivery criterion to be met.

A well known computer training institute appointed some franchisees to conduct training, The institute earns franchise fees in exchange of its brand and technical assistance. The franchisee fee is payable in lumpsum or in installments and is non-refundable. The institute wants to recognize the franchisee fee in the profit and loss account upfront. Is that acceptable?

Answer:

The franchisee fee are in the nature of royalty in exchange of a right to use an asset over a defined period of time and therefore revenue on franchisee fee should be recognized on a time proportion basis over the period of agreement unless having regard to substance of the transaction, some other systematic or rational basis is more appropriate in which case that basis may be adopted. However, recognizing the entire franchisee fee upfront would be unreasonable.