All about Indian accounting standard 18 (Ind AS 18) of revenue recognition

[ecis2016.org] The objective of Ind AS 18 is to prescribe the accounting norms for revenue from certain types of transactions and events

The Indian accounting standard 18 (Ind AS 18) prescribes the accounting treatment of revenue arising from certain types of transactions and events. This standard defines revenue as ‘The income that arises in the course of ordinary activities of an entity and is referred to by various names, including sales, fees, interest, dividends and royalties’.

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Note that money collected on behalf of third parties, such as Sales Tax, Goods and Services Tax (GST) and Value Added Tax, are not economic benefits which flow to the entity and do not result in increases in equity and hence, do not qualify as revenue.

Ind AS 18 scope

The Ind AS 18 is applied in accounting for revenue arising from the following transactions:

• The sale of goods.
• The rendering of services.
• The use of entity assets by others, yielding interest, royalties and dividends.

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Measurement of revenue under Ind AS 18

Revenue is measured at the fair value of the amount received or receivable, after deducting rebates. In case the inflow of cash or cash equivalents is deferred, then, the fair value of the amount may be lower than the nominal amount of cash. The fair value of a consideration is determined, by discounting all future receipts at an imputed rate of interest.

The imputed rate of interest shall be taken as the more determinable of either of the following:

• The prevailing rate for a similar instrument of an issuer with a similar credit rating, or
• An interest rate that discounts the nominal amount of the instrument to the current cash sales price of the goods / services.

Identification of a transaction under Ind AS 18

The recognition criteria in this standard are applied separately to each transaction. However, it may also be necessary to apply the recognition criteria to the separate, identifiable components of a single transaction, to reflect the substance of the transaction in certain circumstances. Conversely, the recognition criteria may also be applied to two or more transactions together, if they are linked in a way that its commercial effect cannot be understood without referring to the series of transactions as a whole.

Recognition of revenue under Ind AS 18

Revenue from the sale of goods

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Revenue earned from the sale of goods is recognised when all the following conditions are met:

• The entity has transferred the significant rewards and risks of ownership of the goods to the buyer.
• The entity neither retains continuing managerial involvement to the extent that is usually associated with ownership nor retains effective control over the goods sold.
• The amount and the costs incurred in the transaction can be measured.
• The monetary benefits from the transaction will flow to the entity.

Revenue from rendering of services

When the outcome of a transaction, which involves the rendering of services, can be estimated, the revenue generated is recognised at the end of the reporting period. The outcome of a services transaction can be estimated reliably. when all the following conditions are met:

• The amount of revenue, the costs incurred for the transaction, the costs to complete the transaction and the completion date, can be measured.
• The benefits from the transaction will flow to the company.

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Revenue from interest, royalties and dividends

Revenue arising from the use of the entity’s assets by others, yielding interest, royalties and dividends is recognised, if it is probable that the economic benefits associated with the transaction will flow to the company. The amount of the revenue should also be measurable.

Disclosure under Ind AS 18

Under this standard, companies should disclose the following:

• The accounting policies used for the recognition of revenue, including the methods to determine the stage of completion of transactions that involve the rendering of services.
• The amount of each significant category of revenue recognised during the period, including revenue arising from:
  • Sale of goods
  • Rendering of services
  • Interest
  • Royalties
  • Dividends
• The revenue amount arising from exchanges of goods or services in each significant category of revenue.

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