IND AS 18 Revenue Recognition

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.

Applicability of IND AS 18 Revenue Recognition

This Standard should be applied in accounting for revenue arising from the following transactions:

• Sale of goods
• Rendering of Services
• Use of entity assets yielding Interest, Royalties or Dividends

Important Definition

• Income is the increase in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases in the liabilities that result in an increase in equity, other than contributions from equity participants.
• Revenue is income that arises in the course of ordinary activities of an entity and if referred to by the variety of different names including sales, fees, interest, dividends, and royalties.
• Fair Value (FV) is the amount for which an asset could be exchanged or the liability settled between knowledgeable, willing parties in an arm’s length transaction.

Measurement of Revenue

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:

• Prevailing rate for a similar instrument of an issue with a similar credit rating
• Rate of interest that discounts the nominal amount of the instrument to the current cash sales price of the goods or services

Identification of Transaction

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.

Sale of Goods

Recognise revenue from the sale of goods when all below conditions are met:

• Transfer of significant risks and rewards of ownership
• Neither continuing managerial involvement nor effective control
• Probable future economic benefits
• Reliable measurement of revenue
• Reliable measurement of costs

Rendering of Services

Sl.No	Event	Revenue Recognition
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:

• Reliable measurement of revenue
• Probable future economic benefits
• Reliable measurement of stage of completion
• Reliable measurement of completion cost

The stage of completion of a transaction may be determined based on the nature of the transaction using the following:

• Survey of work performed
• Services performed to date as a percentage of total services to be performed
• The proportion of the costs that are incurred to date bear to the estimated total costs of the transaction. Using the percentage of completion method also provides useful information on the extent of service activity and the performance during the period.

Interest, Royalty & Dividend

To recognize revenue related to interest, royalties, and dividends, the below-mentioned conditions are to be met:

• Probable future economic benefits
• Reliable measurement of revenue

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

Disclosure

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.

Comparison with AS 9

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

Illustrations

A enters into consignment sales agreement with B who is a supplier. Can B recognize sales revenue in its book as soon as goods are dispatched to A?

No, B can recognize only when A sells the goods to the third parties.

A Ltd sells equipment to B Ltd for Rs. 1,50,000 ( actual cash price is 1,00,000). A Ltd provides a commitment to service the equipment for next 3 years with no additional charges.

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.

A Ltd sells goods with a policy that if a customer is not satisfied with the product, it can be returned and A Ltd would refund the amount paid by the customer for the product.

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.

A, a club, charges Rs 100,000 as entrance fee. An additional annual fee of 20,000 is charged for using the club facilities. Can A recognize the entrance fee as revenue upon receipt?

Yes, since it only permits membership and there is no significant collection uncertainty.

A donates certain perishable food products to Homeless people, which have reached their best before date but are still fit for human consumption. Can A recognize revenue of the goods that are donated?

No. There is no probable inflow of economic benefits