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Revenue recognition

yasaswi gomes (My grammar is 💯 good I) (7290 Points)

10 March 2021

Client manufactures equipment and lends them to customers on a trial basis. If the customer likes the equipment, they will purchase or else will return the equipment back to the manufacturer. Client does not want to recognise it as a sale until the goods are satisfactory to the customer

By receivables a/c

To inventory a/c

(equipment lent to customer on 25th Dec, 2020)

By sales a/c

To Bank a/c

(Customer purchased the equipment after the trial on 30th Jan 2021)

By Bank a/c

To Receivables a/c

(Reconciliation done and receivables derecognised on 30th Jan 2021)

This tallies and my doubt is, is there any problem if sales is not recognised at the year end thereby reducing the profits?

Any Tax policy which mentions that profits cannot be reduced for the sake of paying corporate tax?

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11 Replies

sabyasachi mukherjee (27574 Points)
Replied 10 March 2021

In actual parlance the first entry is not passed.

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yasaswi gomes (My grammar is 💯 good I) (7290 Points)
Replied 10 March 2021

I know, but if a manager/ cfo decided to create a new accounting procedure for his convenience, then is it fine to proceed further without tax implications? the dual aspect is met but (liabilities will be lesser than assets when sale is not recorded) Is there any Indas/ AS law which mentions that above transaction cannot over/understate assets & liabilities?

Note: dual aspect satisfies by fulfilling the balance sheet equation, but it did not promise to tally the balance sheet on the whole.

sabyasachi mukherjee (27574 Points)
Replied 10 March 2021

Nothing is created in a company for one's own use.
It's all according to the organizational specific requirements.

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yasaswi gomes (My grammar is 💯 good I) (7290 Points)
Replied 10 March 2021

That is most plausible. I see businesses sometimes having specific marketing needs like above where economic reality is different from legal form AS. If that is an organisational need, then it could be allowed to be dealt like above, is satisfactory.

CA HARSHITA AGARWAL (FCA) (71 Points)
Replied 10 March 2021

There is no specific mention in IND-AS18 and AS-9 relating to this. However, both the AS mentions about the transfer of significant risk and rewards by the seller to the purchaser as an important condition to constitute a sale and recognize revenue. But in case of goods sent on approval the buyer have an option to return the goods. Now see the quote from IND-AS 118 available on MCA Site Page7, para 16 (Only point D is relevant for you)

"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. Examples of situations in which the entity may retain the significant risks and rewards of ownership are:

(a) when the entity retains an obligation for unsatisfactory performance not covered by normal warranty provisions;

(b) 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;

(c) 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

(d) 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.

So now we can conclude that as significant risk is retained with the owner itself we are correct in not recognizing the revenue for the same.

Moreover, a guidance note issued by the ICAI on Accounting by E-commerce and Cloud Computing Companies, One of the paras quote as under

"Further, in practice, the customers are often provided with an option to return the goods sold. It is important to evaluate each such offer more specifically to understand the facts and circumstances and their implications on accounting. Generally, when the buyer has a right of return and there is uncertainty about the possibility of return, revenue is not recognised until the shipment has been accepted by the customer/ goods are delivered to the customer and the time period for rejection has elapsed."

Hope it is useful for you. For any further clarification or details you can reply here or connect on caharshita81 @ gmail.com

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Kapadia Pravin (17259 Points)
Replied 10 March 2021

Revenue gets recognised at the time of acceptance by purchaser. Till that time, goods consigned remain on approval basis. For accounting purposes, you pass entries accordingly.

mahesh chitpur (nothing) (59 Points)
Replied 10 March 2021

Accordingly means how sir

yasaswi gomes (My grammar is 💯 good I) (7290 Points)
Replied 10 March 2021

Oh yes I read about that consignment accounting in consolidation and agent- principal relationships. Here the customers wants to use the product on trial and give it back. Damage to the goods is also present. All risks like @ CA Harshita Agarwal mentioned, lies with the owner.

sabyasachi mukherjee (27574 Points)
Replied 02 May 2021

Revenue recognition as per AS 9 IS APPLICABLE FOR COMPLETED CONTRACT .

IN THIS CASE THE THERE IS INITIAL OFFER FROM THE MANUFACTURER . THE MANUFACTURER SELLS THE EQUIPMENT ON THE BASIS OF THE OFFER .

THE PURCHASER HAS TWO OPTIONS :

1. PURCAHSE IT OR RETURN.

IF THE GOODS ARE PURCHASED . ITS AN ACCEPTANCE , INVOICE RAISED AND SALE HAS TAKEN PLACE..

IF THE CUSTOMER REJECTS IT HE HAS TO FOLLOW THE TERMS AND AGREEMENT AS ENTERED INTO BETWEEN THE PURCHASER AND SELLER.

AS PER VARIOUS GUIDANCE NOTES ISSUED BY ICAI AND JOINTLY BY INDIAN ACCOUNTING STANDARDS.

REVENUE IS RECOGNISED AT THE POINT OF ACCEPTANCE OF AGREEMENT.THE AGREEMENT MUST HAVE NON ACCEPTANCE CLAUSE.

IN THOSE CASES IT CAN BE DENIED AND SALE IS NOT RECOGNISED.

IF THE BUYER DOES NOT ACCEPT IT HE CAN RESCIND TH

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yasaswi gomes (My grammar is 💯 good I) (7290 Points)
Replied 02 May 2021

I went through the standard and it has Right to return goods. Next, the value of revenue should be included in inventory only... at its cost value and not sales value.

When I fused this RIGHT with Non cash consideration from the standard, when this can’t be reliably measured, the standalone selling price can be used. Which means, the signed customer agreement is worth the selling price until the expiry of right to return. In this method, recognise revenue when a performance obligation is fulfilled.

Rather than the rights method, I’ll use the second method- non cash consideration. My above entries satisfy the performance obligation.

I have to inform that owner now.

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yasaswi gomes (My grammar is 💯 good I) (7290 Points)
Replied 02 May 2021

@ Mr. Sabyasachi Mukherjee do you think the below is possible because AS depreciation is taken over by IndAS?

“We all understand that accounting standards act like facets to the holistic AS conceptual framework. Similarly, other conceptual frameworks like INDAS & IFRS.

Lets look at this example in revenue recognition Transaction cost- Non Cash Consideration. Here Revenue is recognised when a performance obligation is satisfied.

In AS 9.4.1- Revenue is measured by the charges made to customers for goods supplied and services rendered and by the charges and rewards arising from the use of resources by customers and clients.

Now clearly, when an AS company wants to use IndAS 66-69 revenue recognition principles like non cash consideration, the AS entity can use it by disclosing (AS 1.12) the accounting policy as long as there are no tax consequences.

This ways, accountants can modify their treatments and achieve transparency on a large scale. “