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MASB9

Revenue

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Definition

Revenue :

gross inflow of economic benefits during the periodarising in the course of the ordinary activities of an entity

when those inflows result in increases in equity...

measured at the fair value of the consideration receivedor receivable

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Scope

This Standard shall be applied in accounting for revenuearising from the following transactions and events:

(a) the sale of goods;

(b) the rendering of services; and

(c) the use by others of entity assets yielding interest,royaltiesand dividends.

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Sale of Goods

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Sale of Goods

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Sale of Goods

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GOODS SHIPPED FOB SHIPPING POINT BUT SELLERARRANGES SHIPPING

May Company A recognise revenue once its products have been shipped?

No. While title has passed, Company A has retained a significant risk of

ownership. The fact that Company A's insurance would cover asubstantial loss is evidence that it has managed its risk, but Company A

has still retained the risk.

Company A FOB Shipping Point

Assumed risk

during shipment

Insured byCompany A

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GOODS SHIPPED FOB DESTINATION BUT SHIPPINGCOMPANY ASSUMES RISK


No. While Company A has managed its risk, it has not transferred risk to

the buyer.

Company A FOB Destination

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An enterprise may retain a significant risks of

ownership in a number of ways :- Retains an obligation for unsatisfactory performance

not covered by normal warranty provision.

When the goods are shipped subject to installation &the installation is a significant part of the contractwhich has not yet been completed by the enterprise.

When the buyer has the right to rescind the purchasefor a reason specified in the sales contract and theenterprise is uncertain about the probability of return

Sale of Goods

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If an enterprise retainsonly an insignificant riskof ownership, the transaction is a sale and revenueis recognized.

A seller may retain the legal title to the goods solely toprotect the collectability of the amount due

Retail sale when a refund is offered if the customer is notsatisfied

Sale of Goods

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UNLIMITED RIGHT OF RETURN

Q: Company A distributes VCDs and DVDs and allows key customers to return

any slow-moving stock. The returns could result in replacement with other VCDs

and DVDs or return of cash. Company A is able to make a reliable estimate of the

amount of returns.How should Company A account for its revenues?

A: The entity has transferred to the buyer the significant risks and rewards of

ownership. Revenue should be recognised on initial delivery of the goods in an

amount that reflects a reduction for the estimated amount to be returned.

Sale of Goods

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RETENTION OF TITLENon-cancellable purchase order

Title is withelduntil payment

Company ACustomer


A : If a seller retains legal title solely to protect the collectibility of the amount due,revenue recognition is not precluded.

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BILL AND HOLD SALESNon-cancellable purchase order

Company A Customer

Delivery is delayed on customersrequest

Revenue can only be recognized only if the following are met :

Delivery is probable

Item is identified and ready for delivery

Buyer specifically acknowledges the deferred delivery instructions

Usual payment terms apply

Buyer must have a substantial business purpose for bill and hold basis

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LAY AWAY SALES (N DEMEL SATILAR)

Company Z's lay away policy requires that customers put down at least25 per cent of the sales price as an up-front, non-refundable deposit.Once a deposit is received, Z identifies the product to be sold andsegregates it in its warehouse.

Company Z's experience with lay away sales is that most sales areconsummated with an average six-month lay away period before thecustomer pays the entire sale amount.

How should Company Z account for the deposit received?

Company A

Delivery is witheld until final payment

Total price :$2000

Upfront paid: $1200

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LAY AWAY SALES

Revenue is recognized when a "significant" deposit is

received. The determination of whether a deposit isconsidered significant is a matter of careful judgment, basedon all of the relevant facts and circumstances.

In any case, the final conclusion should be supported bysufficient objective evidence.

In this case, the deposit is significant, and therefore,Company A would recognise the sale for the home theatrefor $2,000 in November 2001, with a receivable for $800.

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SALE WITH A BUYBACK AGREEMENT/OPTION

Company A

Bought back for60m$

Sold for 50m$ - agreed to buyback at 60m$

Should Company A recognise revenue and cost of goods sold at the time of delivery?

A : No. Company A has not transferred to the buyer the significant risk and

reward of ownership. Transaction is in the nature of a financing arrangement.

Title is transferred at

delivery

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SALE WITH A BUYBACK AGREEMENT/OPTION

a) Company A retains benefit of ownership (ability to profit from price difference).If significant, revenue should not be recognised until expiration.

b) If company A had the right to buy back at market price and the goods arereadily available in the market, revenue is recognized at the time of delivery.

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Installment sales method

Revenue under the installment sales method isrecognized when cash is col lectedrather than at thetime of sale. Under this method, revenue (and the relatedcost of goods sold) are recognized only when realized.

For instance, the installment method may be used toaccount for sales of real estate when the down paymentis relatively small and ultimate collection of the sales priceis not reasonably assured.

Rev. Recog - 19

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Rev. Recog 19

MATCHING

Once revenues are determined, the expenses incurred ingenerating the revenue should be recognized.

As revenues are earned, certain assets are consumed andservices are used.

Sale of Goods

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Rendering of Services

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a) Fess which are an integral part of the effective yield of a financialinstrument

origination fees received by the enterprise relating to the creation/acquisition of a financial which is held by the ent as an investment

Commitment fees received by the ent to originate/purchase a loan

b) Fees earned as servicing are provided

Fees charged for servicing a loan

Commitment fees to originate/purchase a loan

c) Fees which are earned on the execution of a significant act

Commission on the allotment of shares to client

Placement fees for arranging a loan between borrower and an investor

Loan syndication fees


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Interest, Royalties & Dividends

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Interest, Royalties and Dividends

(a) Interest shall be recognised using the effective interest method(time proportion basis) as set out in Para 31(MASB 9)

(b) Royalties shall be recognised on an accrual basis inaccordance with the substance of the relevant agreement; and

(c) Dividends shall be recognised when the shareholder's right toreceive payment is established (e.g. Formal approval of

shareholders rather than expectation of management)

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Licence fees and royalties.

Fees & royalties paid for the use of an enterprises assetsare normally recognised in accordance with the substance ofthe agreement

Trademarks, patents, software, music copyright and motion picture films

Examples revenue is recognised at the time of sale :-

A licensing agreement for the use of software when the licensor has no

obligations subsequent to delivery. The granting of rights to exhibit a motion picture film in markets where the

licensor has no control over the distributor and expects to receive no furtherrevenues from the box office receipts.

Interest, Royalties and Dividends

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Thankyou.

Documents

MASB 9