Management Accounting

FINC001
Revenue Recognition
UNIT 3
What is Revenue
Some important term
Revenue Recognition Principle
Principles
Revenue Recognition
In Short..
 Proper revenue recognition revolves
around three terms:
Revenue are realized when-
 A company exchanged goods and services for cash
or receivables
 Assets a company receives in exchange are readily
convertible to know amounts of cash or claims to
cash.
 The earning process is completed or virtually
complete
 Four revenue transactions

• Selling products at the date of sales.

• Services provided, when service have been

performed and are billable.

• Permitting others to use enterprise assets, such as

interest, rent, and royalties

• Disposing of assets
Revenue Recognition classified by
type of transaction
Revenue Recognition: 5 Step
Model
 Transaction Price
• The transaction price is the amount of consideration to which an entity
expects to be entitled in exchange for transferring promised goods or
services to a customer, excluding amounts collected on behalf of third
parties (for example, some sales taxes). The consideration promised in a
contract with a customer may include fixed amounts, variable amounts, or
both.

• A simple example on transaction price would be, a customer goes to a

shopping mall and purchases a mobile worth Rs. 15000, so in this
scenario, the amount of consideration is Rs. 15000, viz. the transaction
price, in exchange of transferring the promised goods, viz. Mobile.
 When determining the transaction price, an
entity shall consider the effects of the following,
which is various types of consideration in a
contract other than fixed consideration:
Interest, Royalties and Dividends
Revenue arising from the use of enterprise resources yielding
interest, royalties and dividends should only be recognized when
no significant uncertainty as to measurability or collectability
exists. These revenues are recognized on the following bases:

• (i) Interest: on a time proportion basis taking into account the

amount outstanding and the rate applicable.

• (ii)Royalties: on an accrual basis in accordance with the terms

of the relevant agreement.

• (iii) Dividends from investment in shares: when the owner’s

right to receive payment is established.
 Government Grants

Government grants are assistance by government in

cash or kind to an enterprise for past or future
compliance with certain conditions. They exclude
those forms of government assistance which cannot
reasonably have a value placed upon them and
transactions with government which cannot be
distinguished from the normal trading transactions
of the enterprise.
Government Grants should be recognized in profit
or loss on a systematic basis over the periods in
which the entity recognizes as expenses, the
related costs for which the grants are intended to
compensate.

• Grants related to specific expense

• Grants related to assets
• Grants for immediate financial assistance
• Non-Monetary Government Grants
• Refund of Government Grants