IND AS 18 Revenue Recognition sets the guidelines as to when to recognize the revenue arising from certain types of transactions and the accounting treatment of the same. Revenue is recognized when it is probable that future economic benefits will flow to the entity and these benefits can be measured reliably.
This Standard should be applied in accounting for revenue arising from the following transactions:
Revenue is measured at FV of the consideration received or receivable after deducting trade discounts and rebates. When the inflow of cash (or cash equivalents) is deferred, FV can be less than the nominal amount of cash. Under an effective financing transaction, the fair value of the consideration is determined by discounting all future receipts using an imputed rate of interest.
Interest Revenue = Fair Value of consideration – Nominal Amount of consideration
The imputed rate of interest is the more clearly determinable of either:
This standard is usually separately applied to each transaction but to reflect the substance of the transaction, it can be applied to separately identifiable components of a single transaction.
For example, when the product price includes a substantial amount for subsequent servicing, that amount is deferred and recognized as revenue when that service is performed.
On the other hand, to understand the commercial effect of series of transactions, recognition criteria can be applied together on two or more transactions at the same time.
Recognise revenue from the sale of goods when all below conditions are met:
|1||Outcome estimated reliably||Recognise revenue by reference to stage of completion (percentage of completion method) at end of reporting period|
|2||Outcome not estimated reliably||Recognise revenue only to extent of expenses recognized that are recoverable (no profit recognized)|
Criteria to be considered for reliably estimating the outcome of the transaction:
The stage of completion of a transaction may be determined based on the nature of the transaction using the following:
To recognize revenue related to interest, royalties, and dividends, the below-mentioned conditions are to be met:
|Sl.No||Income Nature||Revenue Measurement|
|1||Interest||Effective interest method (as per Ind AS 109)|
|2||Royalties||Accrual basis in accordance with substance of the agreement|
|3||Dividends||Shareholder’s right to receive payment is established|
Any contingent liabilities and contingent assets should be disclosed in accordance with IND AS 37. Few examples are warranty costs, claims, penalties or possible losses.
Some of the key differences between IND AS 18 and AS 9 are given below:
|Sl.No||IND AS 18 Revenue Recognition||AS 9 Revenue Recognition|
|1||Revenue covers all economic benefits that arise in the ordinary course of activities of an entity which result in increases in equity, other than increases relating to contributions from equity participants||Revenue is 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|
|2||Real estate revenue is specifically not covered||Does not exclude Real estate revenue|
|3||Revenue has to be measured at fair value of the consideration receivable||Revenue is recognized at the nominal amount of consideration receivable|
|4||Specific guidance regarding barter transactions involving advertising services is given||No such specific guidance|
|5||Uses, only percentage of completion method for revenue recognition for rendering of service||Permits the use of completed service contract method|
|6||Requires interest to be recognized using effective interest rate method||Uses time proportion basis for interest recognition|
|7||IND AS 18 does not specifically deal with the same||Existing AS 9 specifically deals with disclosure of excise duty as a deduction from revenue from sales transactions|
|8||Disclosure requirements are more detailed||Not that detailed as IND AS 18|
No, B can recognize only when A sells the goods to the third parties.
In this case, A Ltd would recognize sales of 1,00,000 and the present value of 50,000 should be recognized over the next 3 years as service income.
Accounting treatment of this transaction would require A Ltd to apply the test of “transfer of significant risks and reward” and recognize the revenue during the point of sale provided future returns can be reliably measured based on past experience.
Yes, since it only permits membership and there is no significant collection uncertainty.
No. There is no probable inflow of economic benefits