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Commerce Optional-2019 Paper-1 Suggested Answer to Question-1(b)

“Recognition of Revenue presents two basic problems, namely timing and measurement”. Do you agree? How would you solve these two basic problems?

Answer the Following in about 150 Words

Answer-

Accounting Standard (AS) 9 deals with the bases for recognition of revenue in the statement of profit and loss of an enterprise.

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  • Revenue recognition is mainly concerned with the timing of recognition. 
  • The amount of revenue arising on a transaction is usually determined by agreement between the parties involved in the transaction.
  • When uncertainties exist regarding the determination of the amount, or its associated costs, these uncertainties may influence the timing of revenue recognition.

Solution to the problem based on facts of the situation. As per AS-9 it covers only 3 situations which can be dealt as-

Sale of Goods

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  • transfer of significant risks and rewards of ownership to the buyer.
  • Transfer of property in goods does not coincide with the transfer of significant risks and rewards of ownership. Revenue in such situations is recognised at the time of transfer of significant risks and rewards of ownership to the buyer.

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Rendering of Services

  • Revenue from service transactions is usually recognised as the service is performed. 
  • Performance should be measured either under the completed service contract method or under the proportionate completion method, whichever relates the revenue to the work accomplished.

Interest, Royalties and Dividends

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  • Interest- on the TIME basis determined by the amount outstanding and the rate applicable.

    Measurement on a time proportion basis taking into account the amount outstanding and the rate applicable.

  • Royalties- accrue in accordance with the terms of the relevant agreement and are usually recognised on that basis unless, having regard to the substance of the transactions, it is more appropriate to recognise revenue on some other systematic and rational basis.

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Measurement on an accrual basis in accordance with the terms of the relevant agreement.

  • Dividends- from investments in shares are not recognised in the statement of profit and loss until a right to receive payment is established.

    Measurement when the owner’s right to receive payment investments in is established.

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