Converged AS 9 (IAS -18) vs. Customs and Excise Valuation - Alignment
The new AS 9 or the offspring of IAS-18 comes with a tinge of maturity to the most fundamental concept of Revenue. A comparative analysis between the existing definition as per AS-9 (old) and the new definition proposed to be introduced as per AS-9 ( new) is presented below,
The existing definition reads as in these italics,
Revenue is the gross inflow of cash, receivables or other consideration
arising in the course of the ordinary activities of an enterprise from the sale
of goods, from the rendering of services, and from the use by others
of enterprise resources yielding interest, royalties and dividends
As per the above definition Revenue would constitute only actual gross inflow of physical substances such as Cash, receivables and other considerations in Kind. We also know that when it is a consideration in kind there is a need to adopt fair value of the asset or securities received. This is a scenario where there is transfer of asset as a consideration which creates tangible assets in the books of the service provider. Now let us contemplate the new definition available for Revenue in the converged AS-9 (IAS 18),
The gross inflow of economic benefits during a period arising in the course of ordinary
activities when those inflows result in increases in equity, other than increases relating to
contributions from equity participants.
The term Economic Benefits gives or would impart a wider connotation for inclusion of certain other elements in the term Revenue. For e.g. the recognition of Fair value relating to Customer Loyalty credits which are now explicitly introduced through the IFRIC 13, Customer Loyalty Programs. Attention is invited to circumstances where the service receiver or buyer gives his own tools or assets for the production of the goods or rendering of services. This is a situation familiar in our Customs and Excise parlance, wherein the manufacturer-seller is required to include the amortisation or commonly referred as Tool cost of those Moulds or Jigs offered by the Buyer to the seller for use in Production. The relevant words are contained in Rule 10 of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007
Materials, components, tools, dies, moulds, and consumables used in production of imported goods, supplied by buyer directly or indirectly, free of charge or at reduced cost, to the extent not already included in price
We can find the replica in the Valuation for the purpose of Excise as well.
The reason why this amount is includible in the Invoice price is that, if the seller had engaged his own assets in the production of the buyer requirements, then probably he would have included the Depreciation of such assets in the costing and therefore the pricing. Therefore if buyer supplies freely those items the price is artificially pegged lower and thereby revenue leakages in the form of reduced Duty collections. The sacrifice of own capital consumption in the present leads to additional future economic benefits. Probably this situation would have been visualised in drafting these new standards. The change in status is, whereas earlier revenue considered physical flow of assets as consideration, the new AS 9 recognises Revenue even when there is nothing tangible getting transferred but still contributing to future economic benefits. Though the word or other consideration as per the old definition also gives a possibility for the above interpretations, the level of authentication is enhanced by the usage of the words gross inflow of economic benefits. This is a classic move to bring Substance over Form. The following are the advantages as a result of this alignment,
A layman is that he can check the correctness of the Duty amount stated in the financial statements upon prima facie reference to the Turnover since the basis for valuation under both laws are same.
The need to reconcile the turnover reported for Excise and the one as per Companies Act is eliminated.
Improvement in Asset Turnover ratio and Return on Capital Employed since only the Revenue increases with no corresponding increase in Asset as per the Financial Statements.
A good example pertaining to this new revenue treatment is a community living where a generator is donated by some members and the same is used for servicing other members for a fee and Revenue has to be recognised by the society with a corresponding debit to the asset a/c at cost to the donor. But the case is different when it is a Buyer-Manufacturer transaction. Any Moulds/Jigs given by Buyer are not donated ones. In short there is no Transfer Ownership. The present law gives more weight age to Legality than substance and therefore will not permit debit to asset a/c. Though there is an advantage as in point (3), it is not correct to overstate the revenue generating capacity of existing assets.
But thankfully the IFRS converged AS are on a mission to reverse the trend and make Substance over form. Hopefully there should be an Interpretation or a short guidance note from ICAI to make things crystal clear on accounting of Revenue in these cases.
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