Ind AS 18 Ravi V1

Chapter
Ind AS 18 ‐ Revenue
Students are requested to read ‘Income’ definition and its recognition criteria in Framework for preparation
of financial statements for better understanding of this Ind AS.
Objective
As per the definition of ‘Income’ – Income is increase in assets or decrease in liabilities; ultimately
increase in equity other than contribution by equity participants. It includes all revenue or gains.
Revenue is income that arises in the course of ordinary activities of an entity but this standard deal
with only certain type of income.
This standard mainly focuses on the timing of recognition i.e. when to record revenue in the books
of account. It will be recognised when future economic benefits inflows are probable.
Scope
The definition of “income” is very broad as per Framework. This Standard does NOT discuss all types of
income and it discusses ONLY the following revenues arising in the ordinary course of business:
1. Sale of goods;
2. Rendering of services; and
3. The use by others of entity assets yielding interest and royalties.
‘Revenue’ is a subset of the word ‘Income’.
Recognition & measurement of dividend is dealt by Ind AS 109;
This standard does NOT deal with the following revenues: (Reasons are noted in the brackets)
(i) From construction contracts & services directly related to construction like architect; (dealt in Ind AS
11)
(ii) From lease agreements; (dealt in Ind AS 17)
(iii) Dividends arising from investments in associates / Joint venture accounted for under the equity
method (dealt by Ind AS 28);
(iv) From insurance contracts; (dealt by Ind AS 104);
(v) Change in fair value of financial assets / financial liabilities or disposal (dealt by Ind AS 109);
(vi) Change in value of other current assets;
(vii) Initial recognition and changes in fair value of biological assets related to agriculture activity (dealt
by Ind AS 41);
(viii) Income recognition of agriculture produce (dealt by Ind AS 41);
(ix) The extraction of mineral oils;
Chap. 7 Ind AS 18 - Revenue 111
Definitions
In the ordinary
course of business
Revenue is Gross inflow of economic benefits Which result in INCREASE in

in the period EQUITY; Other than contribution by
equity participants;
Received Receivable
Note:
Other income is restricted to interest & royalty only. In these cases, entity’s resources are used by others
(outsiders) and the entity receives consideration in the form of interest or royalty.
Interest – It is a charge for using the entity’s cash or cash equivalents;
Royalty – It is a charge for using the entity’s long term assets of the entity like Patents, trademarks,
copyrights and computer software;
Revenue in agency relationship (the entity is the agent) is the amount of commission and not the amounts
collected on behalf of the principal.
Say entity billed ₹ 1,000 and GST @18% i.e. 180; It collected totally ₹ 1,180 from the customer – In this
case what is the revenue?
₹ 1,000 is only revenue of the entity. GST amount of ₹ 180 is collected on behalf of the third party
(government) and it doesn’t result in increase in equity; hence it is not revenue of the entity.
Concept capsule 1
The entity receives the Interest net of tax deducted at source (TDS). Is it appropriate to recognise its dividend
revenue net of the tax withheld?
Suggested answer
As per Ind AS 18, revenue as gross inflow of economic benefits during the period arising in the course of the
ordinary activities of an entity when those inflows result in increases in equity, other than increases relating to
contributions from equity participants.
Considering the definition, revenue should be recognised for the gross inflows, which are received and
receivable by the entity on its own account. TDS is deposited with the Government on behalf of the entity and
its credit can be claimed by the entity for the amount of tax due on their account.
This implies that the income is earned by the entity for the gross amount. Therefore, Interest should be
recognised at the gross amount of dividends.
Concept capsule 2
A chain of bicycle shops holds bicycles for short-term hire and for sale. The bicycles available for hire are
used for two or three years and then sold by the shops as second-hand models.
All shops sell both new and second-hand bicycles.
The shops have three sources of revenue: (i) the sale of new bicycles, (ii) the sale of second-hand bicycles and
(iii) the rental of bicycles.
Suggested answer
The sale of a second-hand bicycle is not a disposal of property, plant and equipment, even though the bicycle
112 Ind AS Made Easy Chap. 7
is held for use by the shops for a number of years in their hire business. The bicycle shops are in the business
of selling both new and second-hand bicycles. Therefore selling second-hand bicycles is part of the shops₹
ordinary, recurring activities and hence such sales represent revenue.
Measurement of Revenue
Revenue should be measured at the FAIR VALUE of the consideration received or receivable. In
determining fair value, trade discounts, volume rebates and other incentives (such as cash settlement
discounts) allowed should be deducted.
The amount of revenue is generally determined by agreement between the parties involved in the transaction.
Generally the consideration is received in the form of cash or cash equivalents. However, when the cash
or cash equivalents receivable are deferred, fair value may be less than the nominal amount of
consideration.
E.g. an entity may provide interest-free credit to the buyer or accept a note receivable bearing a below-
market interest rate from the buyer as consideration for the sale of goods.
When the arrangement effectively constitutes a financing transaction, the fair value of the
consideration is determined by discounting all future receipts using an imputed rate of interest.
The imputed rate of interest is either
(a) the prevailing rate for a similar instrument of an issuer with a similar credit rating; or
(b) a rate of interest that discounts the nominal amount to the current cash sales price of the
goods or services (it is the rate at which nominal amount will be equal to current cash price i.e.
IRR / effective rate).
The difference between the fair value computed and nominal value should be recognised as interest
income as per Ind AS 109.
Concept capsule 3
X Ltd. is engaged in manufacturing and selling of designer furniture. It sells goods on extended credit.
X Ltd. sold furniture for ₹ 40,00,000 to a customer, the payment against which was receivable after 12
months with interest at the rate of 3% per annum. The market interest rate on the date of transaction
was 8% per annum. How will X Ltd. recognise revenue for the above transaction?
Suggested answer
In the given case, the term is a deferred credit period and the entity is providing the credit at lower rate
of interest. It is a clear that the transaction includes financing transaction. Hence fair value of revenue
should be determined by discounting at a rate which is the rate of similar instrument i.e. 8%.
Total amount receivable after 12 months = ₹ 40,00,000 x 1.03 = ₹ 41,20,000.
Present Value of receivable (Revenue) = ₹ 41,20,000 /1.08 = ₹ 38,14,815.
Interest income = ₹ 41,20,000 - ₹ 38,14,815 = ₹ 3,05,185.
The following journal entry should be recorded
Date Journal entry Debit Credit
On the date of Customer A/c……….Dr. 38,14,815
transaction To Sales (Revenue) A/c 38,14,815
(Being revenue is recognised at fair value)
After 12 Customer A/c ……..Dr. 3,05,185
months To Interest Income A/c 3,05,185
(Being finance income is recognised at effective rate i.e.
₹38,14,815 * 8%)
Receivable from customer after 12 months (38,14,815 + 3,05,185) ₹ 41,20,000
Received Cash A/c ……..Dr. 41,20,000
consideration To Customer 41,20,000
(Being receipt of consideration is accounted)
Concept capsule 4
A manufacturer sells one of its products for ₹ 500 per unit on credit. To encourage early settlement the
retailer awards its customers a 10 per cent early settlement discount provided that the customer settles
within 30 days of buying the goods.
Normal credit terms are 60 days.
Customer 1 pays ₹40,500, within 30 days of the date of purchase, to settle the amount owing for 90
units bought from the entity.
Customer 2 pays ₹45,000, 60 days after the date of purchase, to settle the amount owing for 90 units
bought from the entity.
Suggested answer
As per Ind AS 18, Revenue should be measured at the FAIR VALUE of the consideration received or
receivable. In determining the fair value, trade discounts, volume rebates and other incentives (such as
cash settlement discounts) allowed should be deducted.
The retailer must measure revenue from the sale of goods to customer 1 at ₹40,500 (i.e. 90 units ×
(₹500 list price less 10% × ₹500 early settlement discount)) and revenue from the sale of goods to
customer 2 at ₹45,000 (i.e. 90 units × ₹500 list price).
Barter
When goods or services are exchanged for goods or services which are of a similar nature and value,
the exchange is not regarded as a transaction which generates revenue. It is like understanding /
adjustment between sellers – say oil or milk suppliers exchange or swap inventories in various locations
to fulfil demand on a timely basis in a particular location. This won’t be accounted as revenue
When dissimilar goods/services are exchanged
Revenue should be measured at
1st Priority – Fair value of goods/services received – adjusted by any cash and cash equivalents
transferred;
If the fair value of goods/services received cannot be measured reliably
2nd Priority - Fair value of goods/services given up – adjusted by any cash and cash equivalents
transferred;
Concept capsule 5
A Ltd. and B Ltd. both are engaged in manufacturing of bottles. A Ltd. operates in northern, eastern and
central parts of India. B Ltd. operates in western and southern parts of India. A Ltd. fulfils the demands
of its customers based on western and southern India by using the bottles manufactured by B Ltd.
Similarly, B Ltd. fulfils the demands of customer based on northern, eastern and central parts of India by
delivering bottles manufacture by A Ltd. How A Ltd. and B Ltd. should recognise the revenue?
Suggested answer
As per Ind AS 18, exchange of similar nature or value - goods or services is not regarded as a transaction
which generates revenue. Based on this principle, assuming that the bottles exchanged are similar in
nature and are of equal value, A Ltd. and B Ltd. should not recognise any revenue on account of
exchange of goods.
Concept capsule 6
A Ltd., a telecommunication company, entered into an agreement with B Ltd. which is engaged in
generation and supply of power. The agreement provided that A Ltd. will provide 1,00,000 minutes of
talk time free to employees of B Ltd. in exchange for getting free power equivalent to 20,000 units. A
Ltd. normally charges Re. 0.50 per minute and B Ltd. charges ₹ 3 per unit. How to measure revenue of A
Ltd. and B Ltd.?
Suggested answer
As per Ind AS 18, when dissimilar goods/services are exchanged - Revenue should be measured at Fair
value of goods/services received adjusted by any cash and cash equivalents transferred;
In the given case, as power per unit rate is clearly available, sales should be recorded at ₹ 60,000 (i.e.
20,000 units * ₹3 per unit) in the books of A Ltd. Revenue in the books of B Ltd. would be ₹ 50,000 (i.e.
1,00,000 units * ₹0.5 per minute);
Concept capsule 7
X Ltd. a dealer of garments, got the renovation of one shop carried out by Y Ltd. In turn, it gave 100 T-
shirts and ₹ 3,000 to Y Ltd. as full payment for the renovation work. Y Ltd. would normally charge ₹
15,000 for the work done. X Ltd. usually sells T-shirts at ₹ 120 each. How Both X Ltd. and Y Ltd. will
account for the above transactions?
Suggested answer
X Ltd.
It received service in exchange of goods. These are dissimilar in nature. In this case, the revenue is
measured at the fair value of the goods or services received, adjusted by the amount of any cash or cash
equivalents transferred.
The fair value of service received is ₹ 15,000 (i.e., the amount that Y Ltd. normally charges for the same
work) and also X Ltd. has transferred cash of ₹ 3,000 to Y Ltd. So X Ltd. will recognise revenue from
sale of goods (T-shirts) as ₹ 12,000 (₹ 15,000 - ₹ 3, 000).
If assume renovation work is capitalised-
PPE a/c Dr 15,000
To Sales a/c 12,000
To Cash a/c 3,000
Y Ltd.
It will recognise revenue (from renovation activities) as ₹ 15,000 [(₹ 120 x 100) +₹ 3,000].
Sale of Goods
Revenue from sale of goods is recognised when ALL the following conditions are satisfied
(a) the entity has transferred to the buyer the significant risks and rewards of ownership of the
goods;
(b) the entity retains neither continuing managerial involvement to the degree usually associated
with ownership nor effective control over the goods sold;
(c) the amount of revenue can be measured reliably;
(d) it is probable that the economic benefits associated with the transaction will flow to the entity;
(NO uncertainty in ultimate collection) and
(e) the costs incurred or to be incurred in respect of the transaction can be measured reliably.
Let us discuss about each important word and solve concept capsule
Notes
Significant risks and rewards
 One should examine the circumstances of the transaction to understand the transfer of risks and rewards;
 In most of the cases, significant risks and rewards of ownership on goods are transferred along with the
transfer of physical goods; (e.g. retail sales)
 But in some cases, transfer of significant risks and rewards related to ownership is transferred either
before or after transfer of physical goods (E.g. sale on approval basis); in such cases, revenue is
recognised at the time of transfer of such risks and rewards to the buyer – subject to other conditions;
 If the insignificant risks of ownership are retained by the seller – Transaction should be considered as
sale and revenue should be recognised. For example – seller retains the legal title to ensure the
collectability of amount due.
 If the entity retains significant risks of ownership, the transaction is not a sale and revenue is not
recognised. An entity may retain a significant risk of ownership in a number of ways. The following are
examples
 when the entity retains an obligation for unsatisfactory performance not covered by normal
warranty provisions;
 when the receipt of the revenue from a particular sale is contingent on the derivation of revenue by
the buyer from its sale of the goods;
 when the goods are shipped subject to installation and the installation is a significant part of the
contract which has not yet been completed by the entity; and
 when the buyer has the right to rescind the purchase for a reason specified in the sales contract and
the entity is uncertain about the probability of return.
 In some industries, like agriculture or mineral ores industries – it is considered as performance may be
substantially complete at the time of agriculture crops have been harvested or mineral ores have been
extracted i.e. prior to actual sale. In such cases when sale is assured under a forward contract or a
Government guarantee or where market exists and there is a negligible risk of failure to sell, the goods
involved are often valued at net realisable value. If closing stock is valued at Sale value (NRV), profit on
such items is recognised in the same year. In this case, these entities should disclose this appropriately.
The following examples help you to understand the above concept.
Concept capsule 8
Rama Krishna Ltd. is involved in manufacturing of automobile parts. The company entered into an
agreement with Toyota Limited for sale of automobile parts. As per the agreement the company should
deliver the goods at the customer’s site and the amount is payable by the customer only on receipt of
goods. Generally it takes 2 days time to deliver the goods to customer’s site. The company sold goods
worth ₹25 lakh on 31st March, 2012 and the accountant recorded the sales on the same date. Discuss
when the risks and rewards are transferred to buyer as per Ind AS 18.
Suggested answer
In the given case the risks and rewards of ownership are transferred only when goods are delivered at the
customer’s site. Amount is NOT receivable by the company if goods are not delivered. Hence sales
should be recorded in 2012-13 and recording in FY 2011-12 is NOT correct. The entity should reverse
the journal entry recorded in 2011-12 and the same should be recorded as inventory as per Ind AS 2. The
entity should record sales in FY 2012-13 as risks and rewards are transferred in that year.
Concept capsule 9
Entity A exports steel from its factory on a CIF basis to entity B in Chicago. The contractual terms state
that insurance is taken out by entity A for the period the steel is in transit and that:
“The seller must pay the costs and freight necessary to bring the goods to the named port of destination,
but the risk of loss or of damage to the goods, as well as any additional costs due to events occurring
after the goods cross the ship's rail, are transferred from the seller to the buyer when the goods are
handed over at Chicago port”
To comply with these terms entity A takes out a bearer insurance document, which means that entity A
would claim for any loss or damage to the steel until the steel is handed over at Chicago port (that is, the
steel is officially documented as being loaded as part of the ship's cargo). At what point of time risks and
rewards are transferred to buyer and when can Entity A can recognise the sales?
Suggested answer
Based on the information, risks and rewards will be transferred to the buyer once the goods are handed
over at Chicago port. Say in case of any damage or any loss till it is handed over the buyer, it is the
responsibility of Entity A. any loss after handed over the goods, should be claimed by Entity B – directly
from the insurer (that is not via entity A).
Considering the above, Entity A should recognise the sales once goods are handed over at Chicago port
assuming all other conditions are satisfied.
Concept capsule 10
An entity imports sports clothing and has a number of distributors. It gives its distributors an extended
credit deal whereby it supplies new fashion items worth ₹10,000 to each distributor for sale to third
parties to encourage a market in these items. The distributor does not have to pay for the goods until the
goods are sold to a third party. If they are not sold within six months of receipt, the distributor can either
return them to the entity or pay for them and keep them. When can the entity recognise the sales?
Suggested answer
As per Ind AS 18, Revenue cannot be recognised when significant risks and returns are transferred.
In the given case, risks and rewards can be transferred earlier of the following
1) The date of receipt of money by the distributor from third party; or
2) Six months after the distributor receives them, provided that they are not returned.
Only then can the entity determine whether performance under the sales contract has occurred and the
risks and rewards of ownership have passed to the distributor, because until then the goods may be
returned. The goods should continue to be treated as the entity's inventory until they are sold.
Concept capsule 11
Surya Ltd. is into manufacturing elevators for residential and commercial purpose. A Customer ordered
for an Installation of elevator for their commercial building for ₹25 lakh. The total consideration of ₹25
lakh includes installation charges. As on 31st March2017, all related material for the elevator is placed at
the customer site but the installation is not yet started. It is expected to be completed in April 2017.
Assuming all other conditions are satisfied, can the entity recognise the revenue in FY 2016-17?
Suggested answer
As per Ind AS 18, Revenue cannot be recognised when significant risks and returns are transferred.
When the goods are shipped subject to installation and installation is significant part of the contract – it
cannot be considered as risks and rewards are transferred till the installation is completed.
In the given case, Lift installation is significant than the shipment of goods to the site. As installation is
not completed till the year end – Surya Ltd cannot recognise revenue. The material shipped to the
customer site should be treated as inventory as on balance sheet date.
"Continuing managerial involvement to the degree usually associated with ownership"

My view - When the significant risks and rewards are transferred to the buyer, the possibility of continuing
involvement may be less possible. It means, in case of genuine sale it cannot take place. If this still occurs,
one should look into the other features of the agreement.
Effect of Uncertainties on Revenue Recognition – probability of economic benefits flow to the entity;
The uncertainties in revenue recognition will be considered depending on the time it arises. The following
diagram helps you to understand the accounting treatment.
Uncertainty in ultimate collection
arises
At the time of recognition of revenue Subsequent to revenue recognition
 Postpone the recognition to the extent  Make a provision for doubtful debts
of uncertainty involved; to the extent of uncertain revenue; i.e.
 Recognise only when the uncertainties recognise the expense in P&L.
are removed;  Revenue recognised should NOT be
 Postponing due to uncertainties is REVERSED;
considered as appropriate accounting;
This topic of ‘effect of uncertainties on revenue recognition’ – same in case of rendering services and other
income also.
Concept capsule 12
Santi Ltd. is manufacturing machinery used in steel plants. It sold machinery to various steel plants during
the year. As per the terms of contract, full price of machinery is not released by the steel plants and 10% of
invoice amount is retained and paid after one year if there is satisfactory performance of the machinery
supplied. The company accounts for only 90% of the invoice value as sales income and the balance amount
in the year of receipt to the extent of actual receipts. Is this accounting treatment in accordance with Ind AS
18?
Suggested answer
As per Ind AS 18, revenue from sale of goods should be recognised only when the significant risks and
rewards of ownership are transferred to the buyer, economic benefits inflow should be probable and other
conditions. Revenue should be measured at fair value of consideration received or receivable.
In the given case, the company transferred the goods as well as the risks and rewards of ownership to the
steel plants. Retention of money does NOT mean the money is not collectable. Based on the past
experience of the company it can make a provision for uncollectible amount. Hence the company should
recognise the sales at fair value i.e. it should bring the 10% amount to present value considering the
appropriate rate.
Concept capsule 13
The board of directors decided on 31st March, 2018 to increase the sale price of certain items
retrospectively from 1st January, 2018. With this price revision, the company has to receive ₹25 lakh for the
sales made during the period i.e. from 1st January to 31st March 2018. The accountant is not interested to
include ₹25 lakh in the sales for 2017-18; Is the accountant correct?
Suggested answer
The price revision has an effect in the current year 2017-18. The entity should recognise ₹25 lakh as
revenue in the current year i.e. 2017-18, ONLY IF it is evidenced that there is no significant uncertainty in
ultimate collection from its customers.
Concept capsule 14
Lucky Ltd. sold goods worth ₹250 crore on credit to Govinda Ltd. for exporting to US. The export order
was cancelled. Govinda Ltd. decided to sell the same goods in the local market at discounted price.
Govinda requested a price discount of 15% and Lucky Ltd. accepted the same. The chief accountant of
Lucky wants to deduct the discount amount from sales value. Is this accounting treatment as per Ind AS
18?
Suggested answer
Lucky Ltd. had sold goods to Govinda Ltd on credit worth for ₹250 crores and the sale was completed in
all respects. On that day, the fair value of consideration receivable is ₹250 crore. Govinda Ltd’s decision to
sell the same in the domestic market at a discount does not affect the amount recorded as sales by Lucky
Ltd.
The price discount of 15% offered by Lucky Ltd. after request of Govinda Ltd. was not in the nature of a
discount given during the ordinary course of trade because otherwise the same would have been given at
the time of sale itself. Now, as far Lucky Ltd is concerned, there appears to be an uncertainty relating to the
collectability of the debt, which has arisen subsequent to the time of sale therefore, it would be appropriate
to make a separate provision to reflect the uncertainty relating to collectability rather than to adjust the
amount of revenue originally recorded. Therefore, such discount should be charged to the profit and loss as
an expense and not shown as deduction from the revenue.
The following table explains the situations and guidance on recognition of revenue under different situations.
Situation Guidance on recognition
1. Delivery of goods is delayed at Recognise the revenue when it is expected that delivery will be
buyer’s request and buyer takes made & it should satisfy the following conditions
title and accepts billing.(i.e.  The buyer must have taken title to the goods and accepted
Goods are with seller) – Called billing;
generally as “Bill and Hold”
 Goods must be in hand, identified and ready to deliver at
the time of recognition;
 The buyer acknowledges the deferred delivery; &
 Usual payment terms apply;
If the risk of damage to the inventory is with the seller, it is
inappropriate to recognise the sales.
2. Delivered subject to conditions: Recognise the revenue only when customer accepts the delivery &
 Subject to installation and installation and inspection is complete. If installation is a simple
inspection process, recognise the revenue when goods are delivered.
 Subject to approval of customer Recognise only when

(Sale on approval)  Goods are formally accepted by the buyer; OR
 Time period allowed is elapsed; OR
 Reasonable time period is elapsed – in case NO specific
period is mentioned;
 Consignment sales Recognise revenue only when goods are sold to a third party by
the consignee.
 Cash on delivery sales Recognise revenue only when cash is received either by the seller
or his agent.
 Sales to intermediate parties, Revenue from such sales is generally recognised when the risks
such as distributors, dealers or and rewards of ownership have passed. However, when the buyer
others for resale is acting, in substance, as an agent, the sale is treated as a
consignment sale.
 Order is noted and will be Revenue is recognised when the goods are delivered to the buyer.
supplied to the customer only
full or partial receipt of advance
for the goods which are not
presently in hand. (Goods are
yet to be manufactured or to be
delivered directly from the 3rd
party).
3. Instalment sales  Recognise revenue on the date of sale to the extent
attributable to sale price excluding interest amount.
 Sale revenue = present value of consideration receivable at
the imputed rate (cash price);
 Interest should be recognised as revenue using effective
rate of interest method.
4. Sale/repurchase agreements i.e. Observe the transaction carefully before you come to a decision.
as per the agreement seller agree Why do someone buy and sell the same goods at different dates.
to repurchase the sold goods from These transactions are in substance financing (a kind of loan)
buyer at a later date. agreements; the resulting cash inflow is NOT revenue as defined
and should NOT be recognised as revenue.
5. Subscriptions for publications  Advance Received should be recognised as liability and
revenue should be recognised on a straight line basis over
time when the items involved are of similar nature;
 If the value of the items differs from period to period,
revenue should be recognised in proportion to the value
of the items delivered to the total sale value of all items
covered by the subscription.
Concept capsule 15
The board of director’s of Krishna Ltd. noticed that the inventory value includes goods worth of ₹2,40,000
(includes ₹20,000 profit). These goods are lying at the site, as the delivery of goods was postponed at the
buyer’s request. Advice the company on accounting treatment in accordance with Ind AS 18.
Suggested answer
As per Ind AS 18, Revenue from sale of goods should be recognised only when the significant risks and
rewards of ownership are transferred to the buyer and it is probable that future economic benefits inflow to
the entity and other conditions.
When delivery of goods is delayed at buyer’s request and buyer takes the title and accepts billing;
revenue can be recognised even though goods are at the seller’s site. However, the goods must be in hand,
identified and ready for delivery at the time of recognition. Terms of payments should be normal and
deferment of delivery should be acknowledged by the customer.
In the absence of information, if we assume that the above conditions are satisfied, the revenue should be
recognised. When revenue is recognised, the goods should NOT be part of inventory.
If we assume that the above conditions are NOT satisfied, revenue should NOT be recognised and
inventory should be valued either at cost or NRV whichever is lower as per Ind AS 2 i.e. at ₹2,20,00.
Concept capsule 16
A publisher of scientific journals publishes and dispatches journals on oceanography on monthly basis to
various libraries and research institutes. The publisher receives the subscription in advance for 3 years for a
period of July 2016, to June 2019, amounting to ₹ 24,00,000 (100 copies of ₹ 500 each for every month &
100 copies a special journal every 6 months once at ₹1,000). The publisher’s financial year is April-March.
How would the publisher account for the revenue in its books for the financial year 2016-17?
Suggested answer
As per Ind AS 18, Revenue should be recognised when the risks and rewards related to ownership of goods
are transferred to the customer. Advance Received should be recognised as liability and revenue should be
recognised on a straight line basis over time when the items involved are of similar nature; If the value of the
items differs from period to period, revenue should be recognised in proportion to the value of the items
delivered to the total sale value of all items covered by the subscription.
In the given case, 9 monthly publications & one half yearly publication is going to be distributed in the
current FY 2016-17. Hence revenue to be recognised = ₹ 5,50,000 [monthly (100 x 500 x 9) + Half yearly
journal (100 x 1,000 x1)]. The balance amount of ₹ 18,50,000 (24,00,000 – 5,50,000) should be considered as
an advance and to be recognised as revenue in the following years based on number of copies sold.
Matching concept
 When Revenue is recognised in one particular period, all the relevant expenses including warranties,
other costs incurred after shipment should be recognised in the same period.
 All these expenses can normally be measured reliably when the other conditions for the recognition
of revenue have been satisfied.
 However, revenue cannot be recognised when the expenses cannot be measured reliably; in such
circumstances, any consideration already received for the sale of the goods is recognised as a
liability.
Rendering of Services
Many business activities fall under ‘service sector’ like installation, repairs, advertisement, financial services,
software maintenance and development, telecommunication etc. Each service is unique from other hence the
management of the entity should understand the nature of service provided and the timing of completion of
service to select the methods for recognising the revenue.
When the outcome of the transaction can be measured reliably –

Revenue from rendering services should be recognised based on stage of completion (% of completion
method) at the end of the reporting period – It means revenue is recognised in the period in which services
are rendered.
Revenue from services can be recognised only when ALL the following conditions are satisfied
(a) the amount of revenue can be measured reliably;
(b) it is probable that the economic benefits associated with the transaction will flow to the entity (No
uncertainty regarding inflow) – Same as discussed under “sale of goods”;
(c) the stage of completion at the end of the reporting period can be measured reliably; and
(d) the costs incurred and the costs to complete the transaction can be measured reliably.
Whenever necessary, the entity reviews and revises the estimates of revenue as the service is performed. The
need for such revisions does not necessarily indicate that the outcome of the transaction cannot be estimated
reliably.
How to compute percentage of completion?
It can be computed in number of ways. Entity should use such method, which measure it reliably. The
following are examples of methods to compute % completion.
(a) surveys of work performed – Performed by a technical expert i.e. surveyor;
(b) services performed divided by total services to be performed; or
(c) Cost model – Cost incurred till date divided by the estimated total costs of the transaction.
Only costs that reflect services are included in the computation.
Progress payments and advances received from customers often do not reflect the services performed.
When outcome of the transaction (total revenue) cannot be measured reliably? (Similar to Ind AS 11)
When total revenue cannot be estimated reliably, revenue shall be recognised only to the extent of the
expenses recognised that are recoverable i.e. no profit should be recognised. This may be possible during
the early stages of a transaction.
When revenue cannot be measured reliably, recovery of costs may not be probable, hence costs should be
recognised as an expense (should not be deferred). This situation leads to a loss. If such uncertainty arises,
the revenue which is already recognised should be provided as expense.
Concept capsule 17
Rama Ltd. is involved in carpentry business. The company got an order from Yeshas academy for making
ONE table. The required material will be supplied by the academy. Amount of charges agreed upon are
₹10,000. The company completed 60% of the table as on 31st March 2018. The accountant of the company
would like to recognise ₹6,000 as 60% of the work is completed. Is this proper accounting treatment as per
Ind AS 18?
Suggested answer
As per Ind AS 18, Revenue from rendering services should be recognised based on percentage of
completion on the balance sheet date.
In the given case, service performed is 60% on the balance sheet date, hence it should recognise ₹6,000 as
revenue in the current year.
Concept capsule 18
Mr. Raja, recharged his mobile with ₹100 on 1st Jan 2018. He is an Airtel subscriber and he used ₹70 till
31st March, 2018 (FY 2017-18) and the remaining amount is used in the next financial year i.e. 2018-19.
When should Airtel company recognise the revenue of ₹100 and why?
Does your answer change if the validity period of recharge expires on 31st March, 2012 but he used only
₹70 worth of talk time?
Suggested answer
As per Ind AS 18, when the outcome of the transaction measured reliably, revenue from rendering services
should be recognised on percentage completion basis.
In the given case, Airtel company is providing services by giving talk time worth of ₹100.
Telecommunication services are said to be performed only when the customer uses the balance in his
account. On receipt of ₹100 the company should record it as advance received from customer (liability)
and that amount should be recognised as revenue whenever services are provided by the company.
As the customer used ₹70 (i.e. 70% of total services), the company should recognise only to that extent in
FY 2017-18 and the balance of ₹30 should be recognised in the next FY i.e. 2018-19.
If the validity period expires on 31st March, 2018, the company does NOT have a liability to provide any
services to customer. Hence, irrespective of actual usage, the company should recognise the balance ₹100
in the FY 2017-18.
Concept capsule 19
Rani Ltd. is involved in media advertising business. It obtained advertisement right for world cup cricket
tournament to be held in May/June 2018 for ₹250 lakhs.
 The entity paid ₹150 lakhs on 31st March, 2018 to secure the advertisement rights and the balance
of ₹100 lakhs was paid in April 2018.
 The entity sold 70% of the available time for ₹350 lakhs on 31st March, 2018. The advertiser
(customer) paid 60% of amount by that date. The balance 40% was received in April 2018.
The advertisement for balance 30% time was processed (sold) in April 2018 for ₹150 lakhs. The advertiser
paid the full amount while booking the advertisement. 25% of the advertisement time is expected to be
available in May 2018 and balance 75% in June 2018, Calculate the profit/loss for the months of April,
May and June 2018.
Suggested answer
should be recognised on percentage completion basis. In the given case, the service is advertisement; The
service (advertisement) is deemed to be performed when the related advertisement appears before the
public.
As the 25% of the advertisement appeared in May 2018 – the entity should recognise ₹125 lakh [(350+150)
* 25%] and in June 2018 the balance of ₹375 lakh (₹500- 125) for 75% of service.
Accordingly the entity should apportion the total cost of ₹250 lakh between May and June month in 25:75
ratio, which will be 62.5 lakhs in May 2018 and 187.5 in June 2018. Hence the profit for May month is
‘62.5 (₹125-62.5) and for June month ₹187.5 (₹375- 187.5).
Concept capsule 20
Master minds Training Institute Pvt. Ltd. is in the business of training of accounting courses. The duration of
course is 6 months starting from Feb 2018. Training fee for courses are payable either in installments or in
lump sum. Training fees collected from each student is ₹50,000 and 100 students joined in Feb 2018 batch.
How should Institute account for the course fees received from students for FY 2017-18?
Suggested answer
should be recognised on percentage completion basis. In the given case, the service is training;
In the given case, course tenure is 6 months and two months training is performed i.e. 1/3rd service is
completed. Hence the revenue to be recognised = 100 * 50,000 * 1/3 = ₹16,66,667. Any excess amount
received should be treated as advance and it should be recognised in the next financial year.
Concept capsule 21
Guru Ltd. is engaged in selling of electronic products and in addition to this it also provides maintenance
service. The maintenance contract tenure generally stands for a period of two years. During this period, it
performs all types of services for any number of times. During the financial year 2018-19, it had collected ₹
50,00,000 from its various customers against the maintenance contract of two years. How should the entity
recognise the revenue from maintenance contract?
Suggested answer
As per Ind AS 18, when services are performed by an indeterminate number of acts over a specified period of
time, revenue is recognised on a straight-line basis over the specified period unless there is evidence that
some other method better represents the stage of completion.
In the given case, as the number of services is indeterminate, recognising revenue on straight line basis over
the service period will be most appropriate.
Concept capsule 22
Mr A is an accountant who is half way through completing his client’s tax return at the end of March (Mr
A’s year end). The client has agreed to pay Mr A ₹5,000 for the completion of the return. The contract
specifies that Mr A has the right to receive payment for any work performed and shall be paid for services
rendered if the contract is broken off before completion at the client’s request. Mr A has accounted for ₹2,500
of the revenue. Do you agree with this?
What would be your answer if the agreement says Mr. A can receive the money on signing the tax report
which is not completed as on 31st March?
Suggested answer
In the given case, Mr. A has right to receive to the extent of work performed. As 50% of the work is
completed as on 31st March which is useful to the client to that extent, accountant has right to receive 50% of
revenue i.e. ₹2,500; hence it is appropriate to recognise this at the end of the year.
As per Ind AS 18, when a specific act is much more significant than any other acts, the recognition of revenue
is postponed until the significant act is executed.
In the given case, signing the tax report is the significant event hence he should not recognise any revenue till
the report is signed by the accountant.
The following are examples of services

Situation When to recognise
1. Installation fees  Recognise only when installation is completed and accepted
by the customer;
(Above guidance is applicable when an entity is providing
installation services only and it is NOT a service along with sale of
goods)
2. Advertisement  Recognise the revenue when the related advertisement
appears before the public; Say if the entity already advertised
40 minutes out of 100 minutes- it should recognise with
respect to stage of completion.
3. Insurance agency commission  Recognise on the effective commencement or renewal dates
of the related insurance policies.
 If the agent should perform services during the tenure of the
policy, a portion of the revenue should be deferred and
recognise over the period of policy.
4. Admission fees on artistic  Recognise revenue when event takes place and no uncertainty
performances, banquets or any in ultimate collection.
special programs.  When a subscription received is for number of events, the fee
received should be allocated to each event on a systematic
and rational basis.
5. Tuition fees  Recognise over the period of instruction on SLM basis.
6. Entrance and membership fees  Revenue recognition depends on the nature of the services
being provided.
 If the fee covers membership, or joining only and all other
services or products are paid for separately, or if there is a
separate annual subscription, the joining or membership fee is
recognised as revenue where there is no significant
uncertainty as to its collectability.
 If the membership fee entitles the member to services or
products during the membership period at prices lower than
those charged to non-members, revenue is recognised on a
basis that reflects the timing, nature and value of the benefits
provided (systematic and rational basis).
7. Fees from development of  Recognise revenue based on stage of completion of the
customised software development, including completion of services provided for
post-delivery service support.
8. Franchise fees Franchise fees recognition as revenue is based on its coverage. the
following
(a) Supplies of equipment and other tangible assets
If the entity need to supply tangible assets for the receipt
of franchise fees, it should recognise the revenue based on
the fair value of assets sold as and when items are
delivered or title passed to the customer;
(b) Supplies of initial and subsequent services
Fees for continuing services should be recognised as and
when services are provided.
If franchisor supplied equipment at a price lower than
market price - part of initial fees should be bifurcated
between fair value of the supplied equipment and other
services. These two elements should be discussed as and
when equipments are sold and services are performed.
If the initial fee is collectible over an extended period and
there is a significant uncertainty that it will be collected in
full, the fee is recognised as cash instalments are received.
(c) Continuing franchise fees.
This is for continuing rights granted or other services
during the period – recognise as revenue as and when
services are provided.
9. Financial service The recognition of revenue from financial service fees depends on
commissions the purposes for which the fees are assessed and the basis of
(to understand this student need to accounting for any associated financial instrument.
have some knowledge of Ind AS a) Fees that are an integral part of the effective interest
109) rate of a financial instrument
i. If the revenue is related to a financial instrument
which is classified as FVTPL (Fair value
through P&L)
Such fees should be recognised as and when financial
instrument is initially recognised;
ii. Related to a financial asset OTHER THAN
FVTPL;
Examples are processing fees, mortgage fees,
guarantee fees, etc. These fees collected will be
integral part of generating financial instrument. These
are deducted from the loan given amount and
considered in effective interest (IRR);
iii. Commitment fees received to originate a loan
other than covered by Ind AS 109;
If it is probable that the entity gives loan and loan
commitment is scoped out of Ind AS 109 –
Commitment fees received will be deducted from the
loan amount and considered for effective interest
(IRR);
If the commitment expires without giving a loan – it
should be recognised as revenue, when commitment
expires.
iv. Loan commitment is covered by Ind AS 109
It will be treated as derivative and measured at fair
value (FVTPL).
v. Originating fees received on issuing financial
liabilities; Financial liabilities are not measured
at FVTPL
Fees received and transaction costs incurred will be
adjusted for calculating effective interest; generally
investment
b) Fees earned as services are provided
i) Fees charged for servicing a loan
Recognise as and when services are provided.
ii) Commitment fees to originate a loan when the

loan commitment is scoped out of Ind AS 109.
It is rarely possible. It should be recognised as
revenue on time proportion basis.
iii) Investment management fees

Recognise as and when services are provided.
Incremental costs that are directly attributable to securing an
investment management contract are recognised as an asset if
they can be identified separately and measured reliably and if it is
probable that they will be recovered. This is amortised as the entity
recognises the related revenue.
If the entity has a portfolio of investment management contracts, it
may assess their recoverability on a portfolio basis.
c) Fees that are earned on the execution of a significant
act.
The fees are recognised as revenue when the significant
act has been completed, as in the examples below.
(i) Commission on allotment of shares to a client
should be recognised when share are allotted.
(ii) Loan arrangement fees – when loan is arranged.
(iii) Loan syndication fees (same as loan arrangement
between group of fund providers and one
borrower) – recognise when syndication is
completed.
Concept capsule 23
Raj kumar Limited involved in servicing air conditions. It received ₹3,000 from a customer on 1st Apr,
2018 for servicing one air condition for 3 years and servicing is performed only once in a year. When
should the company recognise the revenue as per Ind AS 18? (31st March is the company’s financial YE)
Suggested answer
As per Ind AS 18, when the outcome of the transaction can be estimate reliably – recognise revenue based
on stage of completion.
In the given case the servicing work is completed over three years. Hence the amount received on 1st Apr,
2018 should be accounted as advances from customer (liability). (Debit – Cash/ Bank & Credit – advance
received) and when the service is performed in 2018-19, proportionate (₹1,000) revenue should be
recognised i.e. Debit – Advance received & Credit – Revenue. The same journal entry will be recorded in
the next two financial years.
Concept capsule 24
A company grants license for certain number of years to the franchisee for using the company’s brand
name and full assistance of technical know-how in the field of providing education and training in IT
and to use intellectual property for which the company takes registration fees. How is the registration
fees recognised?
Suggested answer
As per Ind AS 18, registration fees should be recognised on time proportion basis over the period of
agreement.
Concept capsule 25
B Ltd. entered into an agreement on 1st March, 2013 to buy computer spares from S Ltd. at prevailing
market price for ₹ 1200 lakhs on which S Ltd. made a profit of 20% and received full advance
payment. The transaction was concluded on 15th March, 2013. On the same day S Ltd. agrees to buy
on 15th Sept, 2013 the same goods from B Ltd. At 20% over cost. The 20% mark-up compensates B
Ltd. for its inventory holding costs till sale date. You are required to show how both buyer and seller
record above transaction in the year 2012-13 explaining in brief the justification for your treatment.
Suggested answer
In the given case, there is a sale of goods at one point of time and repurchase of same goods at a later
date at profit. It is a mere finance arrangement between the parties. Just to make you understand, one
party is giving loan to another and to divert the transaction they have included the goods (Just think
why someone buys their goods at a higher price after some time). Also the re-selling price is pre-
determined and covers purchasing and holding costs of B Ltd. Hence, the transaction between B Ltd.
and S Ltd. should be accounted for as financing rather than sale. The resulting cash flow of ₹1,200
lakhs received by S Ltd., CANNOT be recorded as revenue as per Ind AS 18. The mark up of ₹20 lakh
(20% of ₹1200 lakhs) should be considered as finance charges (interest on loan) and it should be
recognised in the P&L on time proportion basis.
Following journal entries need to be passed in the books of S Ltd.(Entries in books of B Ltd. would be
exactly apposite of below mentioned entries)
Bank A/c……….Dr. 1200
15.3.2013 To Advance from B Limited A/c 1200
(Being amount received from B Ltd. as per sale and
repurchasing agreement)
Financing Charges (Interest exp) A/c ……..Dr. 20
31.3.2013 To Advance from B Ltd. A/c 20
(Financing charges 20% of ₹ 1,200 lakhs for ½ month i.e.
1,200 * 20% * * 0.5 / 12)
Profit and Loss A/c ……..Dr. 20
31.3.2013 To Financing charges 20
(Being amount transferred to P&L A/c)
Concept capsule 26
XYZ Ltd. has undertaken a service contract for ₹ 10,00,00,000. It has spent ₹ 50,00,000 till year end. At the
close of the year, due to rising cost of the inputs, XYZ Ltd. is not able to estimate reliably whether profit
will be earned on the project or not. Suggest whether XYZ Ltd. should recognise revenue or not?
What would be the treatment if due to some legal issues, XYZ Ltd. decides to suspend the project for an
uncertain period and assesses that the cost incurred of ₹ 50,00,000 may not be recoverable.
Suggested answer
As per Ind AS 18, when the outcome of the transaction can be measured reliably, revenue should be
recognised based on stage of completion. When it cannot be measured reliably, entity should recognise the
revenue to the extent of costs incurred if there is no uncertainty.
Situation 1:
XYZ Ltd. should recognise ₹ 50,00,000 as revenue and ₹ 50,00,000 as expenses in the first year. There is no
profit in the current period. This is assuming the costs incurred can be recoverable from the customer.
Situation 2:
When the outcome of a transaction cannot be estimated reliably and it is not probable that the costs
incurred will be recovered, revenue is not recognised and the costs incurred are recognised as an expense.
Since XYZ Ltd. has suspended the project for an uncertain period and it is not certain that cost incurred of ₹
50,00,000 would be recoverable, so XYZ Ltd. should not recognise revenue against the cost incurred. XYZ
Ltd. should recognise the cost incurred of ₹ 50,00,000 as an expense. This leads to a loss of Rs. 50,00,000 in
the current period.
I hope you understood the recognition criteria for sale of goods or services.
One question - before we get into a new concept, How to account, if the entity is selling both the goods and
services together (as a package)?
Say Reliance Company sells the mobile along with two years talk time – as a package for Rs. 10,000. Observe
carefully, this transaction includes sale of goods (mobile) and providing services (for two years). How do you
divide the total consideration received between the goods consideration and services consideration? & when
will the transaction be recorded. Think over it.
Many similar transactions occur in the market, the following discussion helps you understand
Identification of the transaction – Read this carefully
When one transaction includes more than one element i.e. sale of goods and services, the recognition
criteria in this Standard are usually applied separately to each transaction. However, in certain
circumstances, it is necessary to apply the recognition criteria to the separately identifiable components
of a single transaction in order to reflect the substance of the transaction. For example, when the selling
price of a product includes an identifiable amount for subsequent servicing, that amount related to
services should be deferred and recognised as revenue over the period in which the service is
performed. (There is no guidance on bifurcation of revenue between sale of goods and services.)
Generally, contract value (total consideration) will be less than the fair value of the transaction's
separable elements. It means, mobile fair value is ₹ 8,000 and talk time fair value is ₹ 4,000 but the
contract value is ₹ 10,000. As they are selling the two products as a package, customer can get a discount
of ₹ 2,000 (₹12,000 - ₹ 10,000). Such discount should be allocated between the separable components
based on the most appropriate method of allocating the separable components.
Revenue allocation methods include (see examples below)
a) Relative fair values;
b) Cost plus a reasonable margin; and
c) Residual method.
In general, if the contract is profitable as a whole, the entity should ensure that the revenue allocation
policy adopted results in the most appropriate allocation of revenue to the elements of the contract.
Any loss on the overall contract should be recognised at the outset in accordance with Ind AS 37 (if
onerous).
If the vendor sells the different components separately (or has done so in the past), this is a strong
indicator that separation within a multiple element contract is necessary for the purposes of revenue
recognition. If the entity is not selling the separate components independently but other vendors are
selling the same, in such a situation also, separation of the components may still be necessary.
Concept capsule 27
A car dealership sells new cars to customers. Furthermore, as a limited period offer at no extra charge,
the dealer undertakes to maintain the car for three years from the date of purchase. Normally the
dealership charges extra for the maintenance services and these are possible for a customer to purchase
both the car and the maintenance services separately.
Suggested answer
The dealership enters into a sale that has two separately identified elements. In a single transaction the
dealership:
• Sells a good—the new car; and
• Undertakes to provide maintenance services for three years.
The dealership must allocate the fair value of the consideration received (the amount received from the
customer) to the separately identified components of the transaction.
Since the two elements are sold separately, it is possible to allocate the consideration pro rata based
on the fair value of the individual elements when they are sold separately (in the proportion of fair
values). The fair value of the consideration related to car should be recognised when the risks and
rewards related to ownership of the car is transferred and other conditions satisfy. The fair value of
consideration received related to maintenance services should be recognised over the period of three
years based on stage of completion.
Concept capsule 28
An entity sells boats for ₹30,000 each. The entity also provides mooring facilities for ₹2,000 per annum.
The entity sells these goods and services separately. If a purchaser of a boat contracts to buy mooring
facilities for a year there is a 5% discount on the whole package. Thus the ‘package’ costs ₹32,000 less
5% = ₹30,400. How should revenue be recognised?
Suggested answer
As discussed above, the discount amount or consideration of contract, should be bifurcated between the
two elements
The discount in this case is ₹1,600 (the difference between ₹32,000 and ₹30,400).
Using the relative fair value approach,
Discount attributable to the boat = ₹1,500 (₹1,600 × ₹30,000 / ₹32,000); and
Discount attributable to the mooring facilities = ₹100 (₹1,600 × ₹2,000 / ₹32,000).
The revenue recognised on the sale of the boat should, therefore, be ₹28,500 (₹30,000 − ₹1,500), which
will be recognised on delivery of the boat. The revenue recognised for the mooring facilities is ₹1,900
(₹2,000 − ₹100), which will be recognised evenly over the year for which the mooring facility is
provided.
Concept capsule 29
Cars manufactured by X Ltd. are sold with an extended warranty of 2 years for ₹ 5,00,000 while an
identical car without the extended warranty is sold in the market for ₹ 4,50,000 and equivalent warranty
is given in the market for ₹ 60,000. How should X Ltd. recognise and measure revenue in its books on
sale of the car and warranty?
Suggested answer
The substance of the transaction in the issue is that X Ltd. has sold two products: car and the extended
warranty, where both the components operate independently from each other, therefore, these
components should be unbundled and the revenue earned on sale of each product should be recognised
separately.
Revenue attributable to both the components is calculated as follows
₹
Total fair value of car and extended warranty (4,50,000 + 60,000) ₹ 5,10,000
Less: Sale price of the car with extended warranty: ₹ 5,00,000
Discount ₹10,000
Discount and revenue attributable to each component of the transaction
Proportionate discount attributable to sale of car ₹ 8,824
(10,000 x 4,50,000/5,10,000)
Revenue from sale of car (4,50,000 - 8,824) ₹ 4,41,176
Proportionate discount attributable to extended warranty
(10,000 x 60,000/5,10,000) ₹1,176
Revenue from extended warranty (60,000 - 1,176) ₹ 58,824
Revenue in respect of sale of car should be recognised immediately and revenue from warranty should be
recognised over the period of warranty.
Concept capsule 30
Vinay Ltd sells a copying machine in March 2017 and will provide maintenance services for one year from 1st
April. The total consideration received for both the sale and the maintenance activity is ₹1,200. Costs
expected to be incurred to fulfil the contract are ₹700 for the machine (being the cost of inventory) and ₹200
for the maintenance activity. The relative fair values are ₹1,050 and ₹150, respectively. Divide the total
consideration between the goods and services using appropriate method.
Suggested answer
Relative fair value method
If the entity were to apply a relative fair value approach, this would result in a loss (fair value is ₹150 & cost
is ₹200) on the maintenance component of the contract.
The entity therefore needs to consider whether this reflects the economics of the transaction. If the
economic substance of the transaction is that maintenance services are loss making, the entity should
recognise the loss as it is going to be onerous. After accruing for the loss, the remaining undelivered items
will be at break-even once recognised. This is illustrated below Relative fair value policy
The cost of the maintenance activity of ₹200 exceeds the relative fair value of ₹150, resulting in a loss of ₹50.
So recognise the loss of ₹ 50 by debiting loss and crediting a provision. Total costs to be recognised in March
= ₹ 750 (Costs of machine ₹700 + Loss on maintenance contract ₹50).
Following this allocation the entries on the transaction would be as follows:
March 2017
Cash a/c …….Dr. 1,200
To Deferred revenue 150
To Revenue 1,050
(Being revenue related to goods are recognised and related to services are deferred)
Cost for loss on maintenance element accrual… Dr 50
To Accrual for loss on maintenance element …. 50
If the above discussion does not match the economics of the transaction, an entity might apply cost plus a
reasonable margin as an exception to the normal accounting policy.
Cost plus a reasonable margin policy
The overall profit is ₹300 (being the difference between the revenue of ₹1,200 and costs of ₹900). This profit
may be allocated based on a reasonable margin, say for example, ₹250 on the machine and for ₹50 on the
maintenance service (No reason for these numbers).
Following the journal entries:
March 2017
Cash …………………………………………Dr. 1,200
To Deferred revenue (₹200 + ₹50 margin on service) 250
To Revenue (₹700 + ₹250 margin on copier machine) 950
Interest & Royalties Income
Interest and royalty income can be recognised only when it satisfies the following conditions:
a) It is probable that future economic benefits inflow to the entity; &
b) Revenue can be measured reliably;
Recognition basis
 Interest shall be recognised using the effective interest method as per Ind AS 109 (Refer chapter
basics for Ind AS) ;
 Royalty should be recognised on accrual basis in accordance with the terms of agreement.
As discussed above, interest and other income should be recognised only when there is certainty in
receipt. If there is subsequent uncertainty, it should be recognised as expense to P&L.
Concept capsule 31
Arjuna Ltd. sold farm equipment through its dealers. One of the conditions at the time of sale is, payment
of consideration should be made in 14 days and in the event of delay interest is chargeable @ 2% p.m.
Percentage of interest recovery is only 10% on such overdue outstanding due to various reasons. However,
for the year ended 31.3.2018, it wants to recognise interest due from dealers on the balances due. The
amount is ascertained at ₹9 lakhs. Is the proposed accounting correct as per Ind AS 18?
Suggested answer
As per Ind AS 18, interest income can be recognised when there is no uncertainty in ultimate collection.
When uncertainty exists, recognition of revenue should be postponed to the extent of uncertainty involved.
In such cases, the revenue should be recognized only when there is reasonable certainty in ultimate
collection.
As the company could realise only 10% interest for the delayed payments from the dealers in the past, it
can be said that there is uncertainty in collection with respect to 90% of interest. Considering the situation,
the entity can recognise the income only to the extent uncertainties do not exist i.e. it should recognise 10%
of interest and the remaining interest (90%) should be recognised on receipt basis.
Alternatively - 10% rate of recovery on overdue outstanding is also an estimate and is not certain. Hence,
the company is advised to recognise interest receivable only on receipt basis.
Concept capsule 32
Sales and other income of an entity include ₹200 lakh representing royalty receivable for supply of know-
how to a company in South-East Asia, which is recorded on 31st March, 2018. As per the agreement, the
amount is to be received in US Dollars. However, exchange permission was denied to the company in
South-East Asia for remitting the same. Discuss in accordance with Ind AS 18.
Suggested answer
As per Ind AS 18, Royalty income should be recognised on accrual basis as per the terms of the agreement
and there should not be any uncertainty in ultimate collection. When uncertainty exists, recognition of
revenue should be postponed to the extent of uncertainty involved. In such cases, the revenue should be
recognized only when there is reasonable certainty in ultimate collection.
As there was uncertainty in ultimate collection (due to restrictions on remittance of foreign currency) as on
the date of transaction, the recognised royalty should be reversed by recording the following journal entry.
Royalty income a/c…….. Dr 200 lakh
To Royalty receivable a/c 200 lakh
Concept capsule 33
Gabbar singh Ltd. sold goods worth of ₹1,00,000 to Mr. Johny on 1-1-2018 and there was no
uncertainty existing on that date. Due to subsequent fire accident on 14-2-2018 at Mr. Johny’s
premises, he became insolvent. The accountant of the company wants to reverse the sales journal entry
as the customer became insolvent in the year of sales. Is it correct accounting treatment as per Ind AS
18?
Suggested answer
As per Ind AS 18, revenue should be recognised when there are no uncertainties at the time of
recognition and if any uncertainty arises subsequent to revenue recognition it is more appropriate to
make a provision on the receivable to reflect the uncertainty.
In the given situation, there were no uncertainties at the time of recognition and the uncertainties took
place subsequent to recognition, hence it is appropriate to make a provision for doubtful debts and the
accountant should NOT reverse the recognised revenue.
Concept capsule 34
Mr. X purchased a bond for cum-interest price of ₹ 1,05,000 on July 1, 2017. It has a face value of ₹
1,00,000. It pays interest of ₹ 20,000 every March 31. Determine the interest income that Mr. X should
recognise for the period ended March 31, 2018 and give the necessary journal entries.
Suggested answer
The total interest that Mr. X will receive on March 31, 20X2 is ₹ 20,000. The price Mr. X paid, therefore,
includes 3 months of accrued interest (₹ 1,05,000 includes ₹ 5,000 accrued interest). So the total interest
income of ₹ 20,000 will be split between pre- acquisition (₹ 5,000) and post-acquisition periods (₹ 15,000).
The pre-acquisition portion (₹ 5,000) is deducted from the cost of the financial instruments. The post-
acquisition portion (₹ 15,000) is recognised as revenue (interest income).
At the time of purchases of bond
Investment ………………..Dr. ₹ 1,00,000
Accrued interest …………. Dr. ₹ 5,000
To Bank ……………………………₹ 1,05,000
On receipt of interest
Bank …………….Dr. ₹ 20,000
To Accrued interest ₹ 5,000
To Interest income ₹ 15,000
Disclosure
An Entity shall disclose
a) the accounting policies adopted for the recognition of revenue, including the methods adopted to
determine the stage of completion of transactions involving the rendering of services;
b) Revenue recognised during the period from:
(i) the sale of goods;
(ii) the rendering of services; and
(iii) royalties
c) Revenue arising from exchanges of goods or services included in each significant category of
revenue.
d) An entity discloses any contingent liabilities and contingent assets in accordance with Ind AS 37.
Contingent liabilities and contingent assets may arise from items such as warranty costs, claims,
penalties or possible losses.
Special topics from Appendix of Ind AS 18

Topic 1:
Customer Loyalty Programmes
Say You went to a Reliance Fresh store and bought Rs. 5,000 worth of goods. If you have a reliance CARD,
you can swipe and you get credit of some points on some basis. After accumulating some points, one can
redeem the points by way of getting discounts or gifts etc. Say in this case, you got Rs. 100 worth of points
and this will be redeemed by you in the future.
Sometimes, one should accumulate up to some points then only they can redeem. In some companies, this
scheme is operated by third party.
How to account this far now and at the time of redemption of points?
We are going to discuss the same now
Accounting principles
 An entity should account for award credits as a separately identifiable component of the sales
transaction;
 The fair value of the consideration received or receivable in respect of the initial sale should be
allocated between the award credits and the other components of the sale.
 The consideration allocated to the award credits should be measured by reference to their fair
value.
In the above example, sale transaction is ₹5,000 and fair value of point’s ₹100 – In this case, journal entry
Cash ……..Dr 5,000

To Revenue (5,000 – 100) ₹4,900
To deferred revenue ₹100 (fair value of credit points)
Say Rs. 100 cash given or discount given in the next year – Say Rs.500 worth of products purchased but paid
Rs. 400 i.e. redeemed Rs. 100 credit in the next transaction.
Cash a/c ……………….Dr 400

Deferred Revenue a/c .. Dr. 100
To Sales ………………..500
Let us learn some more related points

This kind of exercise cannot be calculated for each transaction. So the entity should perform this for the entire
sales in the current year. The reason is there will some points which may not be redeemed based on
experience, some may be lapsed – Considering all these items, the entity should defer the revenue. For this
purpose, past experience i.e. in the previous year how many points are accumulated and out of this how many
are redeemed.
Concept capsule 35
A pharmacy chain operates a customer loyalty programme. It grants programme members loyalty points
when they spend a specified amount on medicines. Programme members can redeem the points for further
medicines. The points have no expiry date. In one period, the entity grants 100 points. Management estimates
the fair value of medicines for which each loyalty point can be redeemed as ₹ 1.25. This amount takes into
account an estimate of the discount that management expects would otherwise be offered to customers who
have not earned award credits from an initial sale. In addition, management expects only 80 of these points to
be redeemed. At the end of the first year, 40 of the points have been redeemed in exchange for medicines, i.e.,
half of those expected to be redeemed. In the second year, management revises its expectations. It now
expects 90 points to be redeemed altogether. During the second year, 41 points are redeemed.
In the third year, a further nine points are redeemed. Management continues to expect that only 90 points will
ever be redeemed, i.e., that no more points will be redeemed after the third year.
How would the pharmacy chain account for the customer loyalty program? (ICAI Material)
Suggested answer
The fair value of medicines for which each loyalty point can be redeemed as ₹ 1.25. Since management
expects that only 80 points to be reimbursed, the revenue that should be deferred is of ₹ 100 (80 x 1.25).
Year 1
At the end of the first year, 40 of the points have been redeemed in exchange for medicines, i.e., half of those
expected to be redeemed. The entity recognises revenue of (40 points/80 points) x ₹100 = ₹ 50.
Year 2
During the second year, 41 points are redeemed, bringing the total number redeemed to 40 + 41 = 81 points.
The cumulative revenue that the entity recognises is (81 points/90 points) × ₹ 100 = ₹ 90. The entity has
recognised revenue of ₹ 50 in the first year, so it recognises ₹ 40 in the second year.
Year 3
In the third year, a further nine points are redeemed, taking the total number of points redeemed to 81 + 9 =
90. Management continues to expect that only 90 points will ever be redeemed, i.e., that no more points will
be redeemed after the third year. So the cumulative revenue to date is (90 points/90 points) × ₹ 100 = ₹ 100.
The entity has already recognised ₹ 90 of revenue (₹ 50 in the first year and ₹ 40 in the second year). So it
recognises the remaining ₹ 10 in the third year.
All of the revenue initially deferred has now been recognised.
If the scheme is operated by a third party
If a third party supplies the awards, the entity should assess whether it is collecting the consideration allocated
to the award credits on its own account (i.e., as the principal in the transaction) or on behalf of the third party
(i.e., as an agent for the third party).
(a) If the entity is collecting the consideration on behalf of the third party(as an agent), it should:
(i) Measure its revenue as the net amount retained on its own account, i.e., the difference
between the consideration allocated to the award credits and the amount payable to the third
party for supplying the awards; and
(ii) Recognise this net amount as revenue when the third party becomes obliged to supply the
awards and entitled to receive consideration for doing so. These events may occur as soon as
the award credits are granted. Alternatively, if the customer can choose to claim awards from
the entity or a third party, these events may occur only when the customer chooses to claim
awards from the third party. (See below concept capsule)
Say Entity A products are sold by Retailer. Retailer has the authority to issue the loyalty point – total
consideration is received by the retailer. Redemption gift /money is given by the entity A.
Say retailer sold a product for Rs. 100 and it gets a ONE loyalty point to the customer. Say total
consideration is bifurcated between the product and loyalty product is 90 and 10 respectively. Out of
this ₹10 received from the customer the retailer should pay ₹9. The remaining ₹1 is a commission to
him. In this case, retailer behaved like an agent, he should recognise the income of ₹1 (net amount).
(go through point (i) above) It is the difference (₹01) between the consideration allocated to the
award credits (₹10) and the amount payable to the third party for supplying the awards (₹09);
The journal entry will be like this
Cash a/c ………………Dr ₹100
To Sales (Revenue) a/c. ₹90
To Payable to Entity A ₹09
To Commission income ₹01
(Being risks and rewards related to redemption of points are transferred to the entity A – i.e. Once the
retailer pays ₹09 to the entity it has no further obligation)
Payable to Entity A …Dr ₹09

To Cash a/c ₹09
(Being liability is cleared)
Say Customer can redeem the points at some specific retailers (who are eligible) to redeem the
points on behalf of the entity A. It means retailer will be buying the gifts and giving it to the
customer. Hence, retailer receives the money for this as consideration – that should be recognised as
revenue.
Retailer received amount received from entity A:
Cash a/c ………………Dr ₹08
To Sales (Revenue) a/c ₹08
(b) If the entity is collecting the consideration on its own account (NOT an agent), it should measure its
revenue as the gross consideration allocated to the award credits and recognise the revenue when it
fulfils its obligations in respect of the awards.
If at any time the unavoidable costs of meeting the obligations to supply the awards are expected to exceed
the consideration received and receivable for them (i.e., the consideration allocated to the award credits at the
time of the initial sale that has not yet been recognised as revenue plus any further consideration receivable
when the customer redeems the award credits), the entity has an onerous contracts. A liability should be
recognised for the excess in accordance with Ind AS 37 i.e. loss. The need to recognise such a liability could
arise if the expected costs of supplying awards increase, for example if the entity revises its expectations
about the number of award credits that will be redeemed.
Concept capsule 36
An apparel retail chain participates in a customer loyalty programme operated by an airline. It grants
programme members one air travel point with each ₹ 1 they spend on apparels. Programme members can
redeem the points for air travel with the airline, subject to availability. The retailer pays the airline Re. 0.009
for each point. In one period, the retailer sells apparels for consideration totalling ₹ 10 lakhs. It grants 10
lakhs points. The retailer estimates that the fair value of a point is ₹ 0.01.
How would the retailer account for the award credits if it is collecting the consideration on behalf of airline
or on its own account?
Suggested answer
Allocation of consideration to travel points The retailer estimates that the fair value of a point is ₹ 0.01. It
allocates to the points 10 lakhs × ₹ 0.01 = ₹ 10,000 of the consideration it has received from the sales of its
apparels.
Revenue recognition
Having granted the points, the retailer has fulfilled its obligations to the customer. The airline is obliged to
supply the awards and entitled to receive consideration for doing so. Therefore the retailer recognises revenue
from the points when it sells the apparels.
Revenue measurement
If the retailer has collected the consideration allocated to the points on its own account (not an agent), it
measures its revenue as the gross ₹ 10,000 allocated to them. It separately recognises ₹ 9,000 paid or payable
to the airline as an expense.
If the retailer has collected the consideration on behalf of the airline, i.e., as an agent for the airline, it
measures its revenue as the net amount it retains on its own account, i.e., ₹ 1,000 like commission. This
amount of revenue is the difference between ₹ 10,000 consideration allocated to the points and ₹ 9,000 passed
on to the airline.
Topic 2
Transfer of Assets from Customers
Generally in the utilities industry like such as electricity, gas or water – entity receives an item Property, plant
and equipment (PPE) from its customers. This PPE is used to connect the customers to a network and provide
them with ongoing access to a supply of services or commodities. Alternatively, the entity may receive cash
for acquiring PPE which are used for the services.
Generally, if a person needs a power connection – he needs to pay certain amount either for meter or
transformer. This concept helps you to account in the books of the entity who is receiving PPE or cash.
This may also occur in industries other than utilities. For example, an entity outsourcing its information
technology functions may transfer its existing items of PPE to the outsourcing provider.
Can the PPE received be recognised as an asset?

The entity should assess whether the PPE received will satisfy the ‘asset’ definition. As you know, ‘an asset is
a resource controlled by the entity as a result of past events and from which future economic benefits are
expected to flow to the entity’.
In most of the cases, the legal ownership will be with the entity (not with the customer) but the point is can
the entity control the same. Control means, can the entity deal with the PPE as it wants to do i.e. exchange
that asset for other assets, employ it to produce goods or services, charge a price for others to use it, use it to
settle liabilities, hold it, or distribute it to owners.
At what value the PPE received will be recognised in the entity’s books?
If the entity concludes that the definition of an asset is met, it should recognise the transferred asset as an item
of PPE as per Ind AS 16 and measure its cost on initial recognition at its FAIR VALUE.
How should the credit be accounted for?
As per the Ind AS 18, exchange of dissimilar goods/services will be treated as a revenue transaction and it
should be measured at fair value of the goods /services received.
In this case, it should be understood, the PPE received as a consideration for providing a connection to a
network and provide them with ongoing access to a supply of services. Hence it should recognise it as
Revenue. The following Journal entry will be recorded.
Property, Plant and Equipment a/c……..Dr “Fair value”

To Revenue (Sales) “Fair value”
If more than one service are provided in exchange – Does it need to be bifurcated?
If more than one service is provided to the customer, the entity should identify the separately identifiable
services included in the agreement.
Features that indicate that connecting the customer to a network is a separately identifiable service include:
(a) a service connection is delivered to the customer and represents stand-alone value for that
customer;
(b) the fair value of the service connection can be measured reliably.
Accounting is as discussed above, the total fair value of consideration received or receivable should be
allocated to each service and it should be deferred and recognised based on each component i.e. if the service
is for a certain period of time, it should be deferred and recognised when the service is performed.
If an ongoing service is identified as part of the agreement, the period over which revenue should be
recognised for that service is generally determined by the terms of the agreement with the customer. If the
agreement does not specify a period, the revenue should be recognised over a period no longer than the
useful life of the transferred asset used to provide the ongoing service.
How should the entity account for a transfer of cash from its customer?
When an entity receives a transfer of cash from a customer, it should assess whether the agreement is within
the scope of this section. If it is, the entity should assess whether the constructed or acquired item of PPE
meets the definition of an asset. If the definition of an asset is met, the entity should recognise the item of
property, plant and equipment at its cost in accordance with Ind AS 16 and should recognise revenue in
accordance with the above guidance at the amount of cash received from the customer.
Concept capsule 37 (ICAI Material)
An entity enters into an agreement with a customer involving the outsourcing of the customer’s information
technology (IT) functions. As part of the agreement, the customer transfers ownership of its existing IT
equipment to the entity. Initially, the entity must use the equipment to provide the service required by the
outsourcing agreement. The entity is responsible for maintaining the equipment and for replacing it when the
entity decides to do so. The useful life of the equipment is estimated to be three years.
The outsourcing agreement requires service to be provided for ten years for a fixed price that is lower than the
price the entity would have charged if the IT equipment had not been transferred.
Based on the above facts, suggest how the entity would recognise revenue?
What will be your suggestion if after the first three years, the price the entity charges under the outsourcing
agreement increases to reflect the fact that it will then be replacing the equipment the customer transferred?
Suggested answer
Situation 1
The facts indicate that the IT equipment is an asset of the entity. Therefore, the entity should recognise the
equipment and measure its cost on initial recognition at its fair value in accordance with the relevant
provisions of Ind AS 16.
The fact that the price charged for the service to be provided under the outsourcing agreement is lower than
the price the entity would charge without the transfer of the IT equipment indicates that this service is a
separately identifiable service included in the agreement. The facts also indicate that it is the only service to
be provided in exchange for the transfer of the IT equipment. Therefore, the entity should recognise revenue
arising from the exchange transaction when the service is performed, i.e., over the ten-year term of the
outsourcing agreement.
Situation 2
In this case, the reduced price for the services provided under the outsourcing agreement reflects the useful
life of the transferred equipment. For this reason, the entity should recognise revenue from the exchange
transaction over the first three years of the agreement.
Major differences between Ind AS 18 & AS 9 (Converged IFRS) (Ind AS 115 APPLICABILITY IS
DEFERRED BY MCA)
Ind AS 18 (IAS 18) AS 9
Measurement
Revenue should be measured at the fair value of the Revenue is measured at the amount recoverable
consideration received or receivable. Where the inflow from customers. Discounting of deferred
of cash or cash equivalents is deferred, revenue is revenue is normally NOT required. However,
measured at present value of future cash flows. for instalment sales, discounting will be
required.
Revenue recognition – Service rendered
When the outcome of a transaction involving the AS 9 recognizes both completed contract
rendering of services can be estimated reliably, revenue method (where single act or service is
associated with the transaction should be recognized by performed) and proportionate completion
reference to the stage of completion (% of completion) method (where more than one act or service is
of the transaction at the BS date. The outcome of a performed) for recognition of revenue arising
transaction can be estimated reliably when all the from rendering of services.
following conditions are satisfied:
 Revenue should be measured reliably.
 Economic benefits inflow should be probable.
 The stage of completion should be measured
reliably.
 The costs incurred for the transaction and the costs
to complete the transaction can be measured
reliably.
Interest, royalties & dividend
Revenue arising from the use by others of entity assets Guidance is similar to Ind-AS except that
yielding interest, royalties and dividends should be interest is recognized based on time proportion
recognized when all the following conditions are basis considering the amount outstanding and
satisfied: the rate applicable.
 Revenue should be measured reliably.
 Economic benefits inflow should be probable.
Revenue will be recognized on the following bases:
 Interest will be recognized using the effective
interest method.(IRR Rate-Refer AS 30, 31 & 32)
 Royalties will be recognized on an accrual basis in
accordance with the substance of the relevant
agreement.
 Dividends will be recognized when the
shareholder’s gets the right to receive payment is
established.
SPECIFIC REVENUE RECOGNITION ISSUES
Gross Vs. Net

It provides specific guidance to determine whether an AS 9 states that in an agency relationship,
entity is acting as a principal or as an agent. revenue is the amount of commission and not
The features that indicate an entity is acting as a the gross inflow of cash, receivables or other
principal include: consideration.
 The entity has primary responsibility for providing
the goods or services to the customer or for However, it does not provide any specific
fulfilling the order. guidance on determining whether an agency
 The entity has inventory risk before or after the relationship exists. By implication, different
customer order, during shipping on or return. practices may be prevailing on the matter.
 The entity has latitude in establishing prices, either
directly or indirectly, for example by providing
additional goods or services.
 The entity bears the customer’s credit risk for the
amount receivable from the customer.
An entity is acting as an agent when it does not have an
exposure to the significant risks and rewards associated
with the sale of goods or the rendering
Accounting for MULTIPLE-ELEMENT contracts
Say a mobile operator has an offer like this – Buy a mobile for ₹20,000 and get 2,000 minutes talk time
free. In this situation – there are two types of revenues i.e. 1. Sale of mobile and 2. Providing services (talk
time). Sale of mobile (Sale of goods) should be recognised at the time of transaction as risks and rewards
are transferred and the revenue related to talk time (providing services) should be recognised only when the
service is performed by the company. The other question is how to allocate the money received from the
customer between these revenues. Read the following to understand
Ind-AS 18 provides limited guidance on accounting for There is NO specific guidance in Ind AS 18 on
multiple element contracts. It states that the recognition accounting for multiple element contracts.
criteria are usually applied separately to each However, an Expert advisory committee
transaction. However, it should reflect the substance of opinion (in the context of cargo handling)
the transaction. requires revenue to be recognized by attributing
It also requires that the consideration allocated to the the fair value to individual components.
award credits will be measured by reference to their fair
value, i.e., the amount for which those items could be
sold separately.
For example, when the selling price of a product
includes an identifiable amount for subsequent
servicing, that amount is deferred and recognized as
revenue over the period, during which the service is
performed. (i.e. the amount allocated to talk time should
be deferred and it should be recognised in P&L over the
period of talk time used)
Barter transactions
When goods or services are exchanged or swapped for No authoritative pronouncement, except the
goods or services that are of a similar nature and value, Guidance Note on Accounting by Dot-com
the exchange is NOT regarded as a transaction which Companies, provides any specific guidance on
generates revenue. accounting for barter transactions.
Revenue on exchanges of dissimilar goods or services is The guidance note deals with accounting for

measured at the fair value of the goods or services advertising barter transactions. In accordance
received, adjusted by the amount of any cash or cash with the guidance note, revenue arising from
equivalents transferred. barter transactions should be recognized only
If the fair value of the goods or services received cannot when, the fair values of similar transactions are
be measured reliably, the revenue is measured at the fair readily determinable from the entity’s history. It
value of the goods or services given up, adjusted by the also lays down the criteria to determine whether
amount of any cash or cash equivalents transferred. fair value of advertising services can be reliably
determined. Where reliable estimates of fair
value are not available, it may not be
appropriate to recognize revenue and the
associated costs involved in barter transactions.
Carve outs Ind AS 18 Vs. IAS 18
On the basis of principles of the IAS 18, IFRIC 15 on Agreement for Construction of Real Estate,
prescribes that construction of real estate should be treated as sale of goods and revenue should be recognised
when the entity has transferred significant risks and rewards of ownership and has retained neither continuing
managerial involvement nor effective control.
Carve out: IFRIC 15 has not been included in Ind AS 18, Revenue. Such agreements have been scoped
out from Ind AS 18 and have been included in Ind AS 11, Construction Contracts.
Carve out: A footnote has been added in paragraph 1 to Ind AS 18, Revenue, that for rate regulated
entities, this standard shall stand modified, where and to the extent the recognition and measurement of
revenue of such entities is affected by recognition and measurement of regulatory assets/liabilities as per the
Guidance Note on the subject being issued by the Institute of Chartered Accountants of India.
Practice Problems
Question No. 1
Moon Limited sold goods worth ₹6,50,000 to M/s Star and Company. M/s Star and Company asked for
trade discount of ₹53,000 which was agreed by Moon Limited. The sales were affected and goods were
dispatched. After receiving, goods worth ₹67,000 was found defective, which was returned immediately
by M/s Star and Company. It made the payments of ₹5,30,000 to Moon Limited. Accountant of the
company booked the sales for ₹5,30,000. Discuss the accounting treatment given by the accountant with
reference to Ind AS 18.
Answer
As per Ind AS 18, revenue is the gross inflow of economic benefits in the ordinary course of business. It
should be recognised at fair value of the consideration received or receivable.
Revenue from sales should be recognized at the time of transfer of significant risks and rewards. If the
delivery of the sales is not subject to approval from customers, then the transfer of significant risks and
rewards would take place when the sale is affected and goods are dispatched. Accordingly, Moon Ltd.
should record the sales at ₹5,97,000 (i.e. ₹6,50,000 – ₹53,000) and goods returned worth ₹67,000 is to be
recorded in the form of sales return. Therefore, the contention of the accountant to book the sales for
₹5,30,000 is not correct.
Question No. 2
A Ltd. entered into a contract with B Ltd. to dispatch goods valuing ₹25,000 every month for 4 months
upon receipt of entire payment. B Ltd. accordingly made the payment of ₹1,00,000 and A Ltd. started
dispatching the goods. In third month, due to a natural calamity, B Ltd. requested A Ltd. not to dispatch
goods until further notice though A Ltd. is holding the remaining goods worth ₹50,000 ready for
dispatch. A Ltd. accounted ₹50,000 as sales and transferred the balance to Advance Received against
Sales. Comment upon the treatment of balance amount with reference to the provisions of Ind AS 18
Answer
As per Ind AS 18,
Recognise the revenue when it is expected that delivery will be made & it should satisfy the following
conditions
The buyer must have taken title to the goods and accepted billing;
Goods must be in hand, identified and ready to deliver at the time of recognition;
The buyer acknowledges the deferred delivery; &
Usual payment terms apply;
If the risk of damage to the inventory is with the seller, it is inappropriate to recognise the sales.
In the given case, transfer of property in goods results in or coincides with the transfer of significant
risks and rewards of ownership to the buyer. Also, the sale price has been recovered by the seller. Hence,
the sale is complete but delivery has been postponed at Buyer’s request. A Ltd. should recognize the
entire sale of ₹1,00,000 (₹25,000 * 4) and NO part of the same is to be treated as advance receipt against
sales.
Question No. 3
A infrastructure company has constructed a mall and entered into agreement with tenants towards
license fees (monthly rental) and variable license fees, a percentage on the turnover of the tenant (on an
annual basis). Chief Finance Officer wants to account/recognize license fee as income for 12 months
during current year under audit and variable license fees as income during next year, since invoice is
raised in the subsequent year. As an auditor, how would you deal and state in the statement of
Accounting policies?
Answer
Ind AS 18 is mainly concerned with the timing of recognition of revenue in the statement of profit and
loss of an enterprise. However, when uncertainties exist regarding the determination of the amount, or its
associated costs, these uncertainties may influence the timing of revenue recognition. Further, as per
accrual concept of fundamental accounting assumptions, revenue should be recognised as and when it is
accrued i.e. recorded in the financial statements of the periods to which they relate.
In the present case, monthly rental towards licence fees and variable licence fees as a percentage on the
turnover of the tenant though on annual basis is the income related to common financial year. Therefore,
recognising the fees as revenue cannot be deferred simply because the invoice is raised in subsequent
period. Hence it should be recognised in the financial year of accrual.
Therefore, the contention of the CFO is not in accordance with Ind AS 18 and hence the auditor may
qualify the report indicating the understatement of income/profit and that the profit and loss account does
not exhibit a true and fair view of the profit or loss.
Question No. 4
A Ltd is a manufacturer of readymade garments. It sells its products to franchisees located across the
country. Readymade garment industry is subject to change in trends of fashion and as such, some of the
goods are returned and A Ltd accepts them back as sales returns. On the basis of past trends such
returns are estimated to be at 20% of the sales of any year. For the financial year 2017-18, A Ltd had
accounted for the actual sales return made up to 31st March 2018 but has not reversed the possible
expected return that are likely to happen after 31st March 2018, in respect of the sale made for the FY 17-
18. Mr. X the auditor of A Ltd wants this to be considered in the accounts for the year ended on 31st
March 2018 but the company is of the opinion that although there is a probability of some goods being
returned by the franchisees, there is no significant uncertainty regarding the amount of consideration that
will be derived from the sale of goods, since the goods are not in the possession of the company and risk
and rewards of ownership still lie with the franchisees and the company cannot record sales returns in its
books of account in respect of goods that are likely to be received after the date of balance sheet.
Comment
Answer
As per Ind AS 18, one of the conditions given to recognise is that economic benefits inflow should be
probable i.e. no significant uncertainty with respect to collection. When uncertainties exist regarding the
determination of the amount, or its associated costs, these uncertainties may influence the timing of
revenue recognition and it should be postponed.
In the given case, A Ltd. is a manufacturer of readymade garments and sells its products to franchisees
located across the country. Due to change in trends of fashion etc sold goods are being returned and A
Ltd. accepts them back as sales returns. On the basis of past trends such returns are estimated as 20% of
the sales of any year. In this case, the company is bearing the risk of sales return at the time of sale itself
(it is known based on the past trends) and therefore, the company should not recognize the revenue to the
extent of 20% of its sales. The company may disclose suitable revenue recognition policy in its financial
statements separately. In the absence of the above, the auditor must qualify his report.
Question No. 5
M/s Prima Co. Ltd. sold goods worth ₹50,000 to M/s Y and Company. At a later date, M/s Y and Co.
asked for discount of ₹8,000 which was agreed by M/s Prima Co. Ltd. The sale was affected and goods
were despatched. After receiving, goods worth ₹7,000 were found defective, which they returned
immediately. They made the payment of ₹35,000 to M/s Prima Co. Ltd. Accountant booked the sales for
₹35,000. Discuss.
Answer
In the given case, M/s Prima Co. Ltd. should record the sales initially at gross value of ₹50,000.
Discount of ₹8,000 in price and goods returned worth ₹7,000 are to be adjusted by suitable provisions as
they occurred at a later date. M/s Prime Co. Ltd. might have sent the credit note of ₹15,000 to M/s Y &
Co. to account for these adjustments. The contention of the accountant to book the sales for ₹35,000 is
not correct.
Question No. 6
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, 2018. The details are given below:
Quantity of Gold sold = 10,000 TT Bars
Gold Rate as on March 31, 2018 = ₹275 per TT Bar
Gold Rate was fixed on 30-06-2018 before the finalization of accounts of company = ₹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, 2018.
Answer
We need to refer to Ind AS 10 along with Ind AS 18 in this case. As per the events occurring after the
balance sheet date, the price of gold is fixed at ₹273 per TT Bar, gold will be valued at that rate.
Question No. 7
A manufacturing co. has the following stages of production and sale in manufacturing fine paper rolls:
Date Activity Costs to date (₹) NRV ₹
15.01.18 Raw Material 1,00,000 80,000
20.01.18 Pulp(WIP 1) 1,20,000 1,20,000
27.01.18 Rough & Thick paper (WIP 2) 1,50,000 1,80,000
15.02.18 Fine paper rolls 1,80,000 3,50,000
20.02.18 Ready for sale 1,80,000 3,50,000
15.03.18 Sale agreed and invoice raised 2,00,000 3,50,000
02.04.18 Delivered and paid for 2,00,000 3,50,000
Explain the stage on which you think revenue will be generated and state how much would be net profit for
year ending 31-03-18 on this product according to Ind AS 18.
Answer
As per Ind AS 18, revenue from sale of goods is recognised only when significant risks and rewards related to
ownership are transferred to the buyer.
Thus sale will be recognised only when the following two conditions are satisfied:
i. The sale value is fixed and determinable.
ii. Property of the goods is transferred to the customer.
The conditions are satisfied only on 15-03-18 when sales are agreed upon at a price and goods are allocated
for delivery purpose through invoice. The amount of net profit ₹1,50,000 (3,50,000 – 2,00,000) would be
recognised in the books for the year ending 31-03-2018.
Question 8
Producer X enters into a licensing agreement with a distributor, Y Ltd. to exhibit a motion picture movie in
the market. The arrangement includes a non-refundable one-off fee of ` 10 Cr to be paid by Y Ltd. The
licensor (producer) has no control over the distributor and the licensor has no share in the box office
collection. At what point of time producer X should recognise revenue?
Answer
In this situation, producer X should recognise revenue when the license is granted and other conditions for
revenue recognition from sale of goods under Ind AS 18 are fulfilled. In some cases, whether or not a license
fee or royalty will be received is contingent on the occurrence of a future event. In such cases, revenue is
recognised only when it is probable that the fee or royalty will be received, which is normally when the event
has occurred.
Question 9
On 1st Jan18 a gold merchant that had recently acquired an executive jet received landing rights at a local
airport in exchange for 100 ounces of gold, when gold was trading at ₹1,000 per ounce. Discuss
Answer
The exchange of gold for landing rights is an exchange of dissimilar goods. The gold merchant must measure
revenue from the sale of goods (gold) at ₹100,000 (i.e. this is considered to be the fair value of the landing
rights (the consideration) received). In this case the fair value of the consideration received in the exchange
transaction is most reliably measurable by reference to the fair value of the gold—a commodity traded in an
active market.
Calculation: 100 ounces of gold × ₹1,000 per ounce = ₹100,000.
"There are only two ways to live your life. One is as though nothing is a miracle.
The other is an though everything is a miracle"
- Albert Einstein
Determining whether an entity is acting as a principal or as an agent
Determining whether an entity is acting as a principal or as an agent requires judgement and
consideration of all relevant facts and circumstances.
An entity is acting as a principal when it has exposure to the significant risks and rewards
associated with the sale of goods or the rendering of services. Features that indicate that an entity
is acting as a principal include:
(a) the entity has the primary responsibility for providing the goods or services to the customer
or for fulfilling the order, for example by being responsible for the acceptability of the products
or services ordered or purchased by the customer;
(b) the entity has inventory risk before or after the customer order, during shipping or on return;
(c) the entity has latitude in establishing prices, either directly or indirectly, for example by
providing additional goods or services; and
(d) the entity bears the customer’s credit risk for the amount receivable from the customer.
An entity is acting as an agent when it does not have exposure to the significant risks and rewards
associated with the sale of goods or the rendering of services. One feature indicating that an entity
is acting as an agent is that the amount the entity earns is predetermined, being either a fixed fee
per transaction or a stated percentage of the amount billed to the customer.
AS 9: Revenue Recognition
Revenue is a Gross inflow of cash, receivable or other consideration.
AS discusses about
Sale of goods Rendering of services Other Income
 Transfer of property in
goods
 Significant Risks & Divisible Indivisible
rewards are transferred
to buyer. % of completion Recognise on significant completion
Interest Royalty Dividend

Recognise on
Recognise
Time proportion Accrual basis/as
when right to
basis per agreement
receive
At the time of recognition is established
 If there are any uncertainties – STOP & Postpone recognition
 Recognise only after removal of uncertainties
Subsequent uncertainties – Make proper provision
Disclosure:
 Revenue recognition policy
 Change in policy if any
 Disclose if revenue recognition is postponed
 Gross turnover, Excise duty and net turnover – Disclose Separately

Ind AS 18 Ravi V1

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Ind AS 18 Ravi V1

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Chapter

Revenue is Gross inflow of economic benefits Which result in INCREASE in

"Continuing managerial involvement to the degree usually associated with ownership"

At the time of recognition of revenue Subsequent to revenue recognition

 Subject to approval of customer Recognise only when

When the outcome of the transaction can be measured reliably –

The following are examples of services

ii) Commitment fees to originate a loan when the

iii) Investment management fees

Identification of the transaction – Read this carefully

Special topics from Appendix of Ind AS 18

We are going to discuss the same now

Cash ……..Dr 5,000

Cash a/c ……………….Dr 400

Let us learn some more related points

Payable to Entity A …Dr ₹09

Can the PPE received be recognised as an asset?

Property, Plant and Equipment a/c……..Dr “Fair value”

Ind AS 18 (IAS 18) AS 9

Ind AS 18 (IAS 18) AS 9

Sale of goods Rendering of services Other Income

Interest Royalty Dividend

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