In IFRS 15 Revenue is measurable by the amount chargeable to the client for the sale of goods or services. However, for agency relationships, revenue should be measurable in terms of what is chargeable as a commission, not the total inflow of cash, accounts receivable, or other considerations.
There are some exceptions to the above statement to which special considerations apply:
- Income from construction contracts
- Revenue from rental purchases and rental contracts
- Income from government grants and other similar grants
- Insurance company revenue from insurance contracts
Meaning and Scope.
Revenue means the total inflow of cash, receivables, or other consideration generated in the course of a company’s normal activities, such as:
- Sale of goods.
- Service rendering.
- Use of corporate resources by others, interest, dividends and royalties.
Revenue Recognition Applicability(IFRS 15)
This standard was published by ICAI in 1985 and was recommended only to Level I companies for the first few years, but has been mandated by all other companies since April 1, 1993.
According to ICAI, “A company means a company as defined in Section 3 of the Companies Act 1956.”
Level I companies are those with sales of more than 50 crores in the previous fiscal year. Sales here do not include other income and apply to the holding company and its subsidiaries.
Description
- Firstly, Revenue recognition focuses on the timing of revenue recognition in a company’s income statement
- Secondly, the amount of revenue generates from a transaction is usually determinable by an agreement between the parties who involves in the transaction.
- Moreover, if there are uncertainties regarding the determination of the amount or associated costs, these uncertainties can affect the timing of revenue.
Timing: -Revenue should be recognized at the time of sale of the service offer.
Transactions excluded
AS 9 does not apply to:
- Income from construction contracts.
- Revenue from employment, purchases and rental contracts.
- Government grants and income from subsidies.
- Insurer revenue from insurance contracts.
Sale of Goods
According to AS 9, revenue from the sale of goods is recordable when:
- The seller has transferred ownership of the goods to the buyer at a price.
- All significant risks and rewards of ownership are transferable to the purchaser.
- Subsequently the seller does not retain effective control of ownership of the transferred goods.
- There is no significant uncertainty in the collection of consideration.
Rendering of Services
Revenue from the service is recordable when the services run. It is measurable in two ways.
- Completer Service Contract Method: – However , Revenue is recordable when the contract completes, that is, when the service completes.
- Proper completion method: – Similarly, Revenue is recordable proportionally, that is, in proportion to the degree of completion of the service under the contract.
Effects of Uncertainties
Further, Revenues are recordable only if there are no significant uncertainties in the collection of consideration. Revenue recognition is whether the final collection is uncertain.
Likewise if there is uncertainty about the recovery of revenue after revenue recognition, it is better to prepare for the uncertainty of recovery.
Disclosure
Above all if revenue recognition is postponable , you must disclose the circumstances that require the postponement.
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