INCOME Earned by business and not necessarily received

INCOME Earned by business and not necessarily received Who is the Man of the Match of India Vs New Zealand Match On Sale of Goods Sale = Transfer of Ownership = Risk and Rewards are transferred. On Rendering of Services

Income received on Services Match Fees Match Awards Chennai Metro Rail Can be considered as Income only when the Match is actually Over Can be Considered as Income only when Match Income can be is over and decided in his considered as when favour. one area is completed

Broad Areas of Coverage n Applicability n Revenue n Timing of Recognition of Revenue (a) Sale (b) Service (c) Use of enterprises resources by others – Interest, Royalties and Dividends. n Overriding Conditions n Disclosure requirements

Applicability n Gross inflows arising in the ordinary course of activities from sale of goods, from rendering services and from use of enterprise resources by others.

Revenue - Exclusions n Gains on sale of Fixed Assets n Unrealised Gains on Current Assets n Forex Gains n Reduction in liabilities.

Recognition of Revenue n Sale n Service n Interest, Royalties and Dividends

Revenue Recognition - Conditions Right to Receive Control over goods lies with buyer Transfer of ownership Sale of Goods Certainty of Amount Certainty of Collection Sale in Ordinary Course of business

Revenue Recognition - Conditions Right to Receive Performance of Service Rendering of Services Certainty of Collection Certainty of Amount

Rendering of Services – Revenue recognition methods Proportionate completion Full Completion services Recognise Proportionately based on degree of completion Determined based on Ø Ø Contract Value, Associated costs, Number of acts, or Other suitable basis. Recognise only when service ü ü fully or substantially performed & becomes chargeable.

Revenue Recognition - Conditions Certainty of Collection Right to Receive Use of enterprise resources by others Certainty of Amount

Income from use of enterprise resources by others Item Basis Interest Time proportion basis Royalties Accrual basis (based on right to receive) Dividend Right to receive is established [On approval by Board of Directors (interim div. ) / On approval by Shareholders (final div. )]

Dividend – Time of Recognition Dividend related to Investment in Subsidiaries Others Time of Recognition Is it related to the period prior to Balance Sheet date of Holding company? Yes Recognise in current year Balance sheet No Recognise when declared

Overriding Conditions n Measurable n No uncertainty as to collections

Specific Questions n Ad. Agency Commission n Money retained by customer as retention money n Membership Fees n Retrospective Sale Price Increases n Money Back Sales n Sale of future goods n Sale & Buy Back = Treated as Finance Income

Disclosures n n Significant Accounting Policies Excise Duty

Areas of Discussion ü Applicability ü Definition ü Types of Contracts and Treatment ü Definitions: (a) Contract Revenue (b) Contract Costs ü Recognition of Contract Revenue ü Percentage of Completion ü Disclosure Requirements

Applicability ü Accounting for revenue and costs associated with the Construction Contracts. ü Not Applicable for construction and Sale of properties.

Definition ü ü Construction Contracts Contract for construction of asset or group of assets which are interrelated in design, technology or purpose. ü Includes contracts for rendering of services in relation to construction

Types of Contracts n Fixed Price Contract: Fixed Contract Price + Escalation claims. n Cost Plus Contract: Costs reimbursed + Fixed % / Fixed amount.

Contract Revenue n Agreed Amount n + Variations + Claims + Incentive Payments - Probable to realise - Reliably measured n Variations = Changes in the Scope of Work n Claim= Reimbursement of costs claimed by contractor from customers. n Incentive Payments = if performance standards met

Contract Costs n Costs directly related to specific contract n Costs attributable to contract activity and allocated n Specific chargeable costs to customers n Exclusions

Recognition Criteria n If outcome can be estimated reliably: Contract Revenue and Costs to be recorded w. r. t. stage of completion of contract activity. (Percentage of Completion Method) n Percentage of completion measured thru: (a) “Costs Incurred” Till Report Date ÷ Esti. Total Costs (Costs Incurred excludes advances for future work) (b) Physical Work Completion (based on Sq. fts. ) (c) Survey of Work Performed

Disclosure Requirements n Contract Revenue recognised as revenue n Methods to ascertain the contract revenue n Methods for stage of completion of contracts n For Contracts in WIP: (a) Costs incurred + Recognised Profits – Recog. Losses (b) Advances from & Retentions by customers

Disclosure in Balance Sheet n Gross amount due from Customers: Costs incurred + Recognised Profits – Recognised losses – Progress Billings n If above amount is negative, then it is Gross Amount due to the Customers.

Meaning Lease Conveying right to use the asset ü One payment, or ü Series of payment Consideration Lessor Ø Person who gives right to use the asset Ø Owner of the asset Lessee Ø Person who buys right to use the asset Ø User of the asset Parties involved

Meaning Basis Lease Term Inception of lease Primary period Secondary period Period Non cancellable Lessee has option to continue Consideration Exist May or may not exist Earlier of the date of – Ø Lease agreement Ø Commitment to principal provision of lease

Classification Finance lease Operating lease Meaning Lease other than Finance lease Substantial risk & rewards transferred to lessee Similar to Hire purchase transactions Rental agreement

AS 19 Lease = Broad Areas (a) (b) (c) (d) (e) (f) (g) Meaning of Lease Terms in relation to lease Classification – Finance / Operating Criteria for Classification Accounting under Finance Lease Accounting under Operating Lease Disclosure Requirements

Related Terms Fair Value = Amount for which an asset exchanged between knowledgeable and Willing Parties (similar to CASH PRICE). Residual Value = Amount expected to realise at the end of useful life. Guaranteed RV + Unguaranteed RV (UGRV)

Related Terms Minimum Lease Payments For Lessor Instalments + Residual Value (guaranteed by Lessee / Third party) For Lessee Instalments + Residual Value (guaranteed by Lessee)

Related Terms – Lessor angle Gross Investment in Lease (GIL) = MLPs + UGRV = Sum of Instalments + RV Unearned Finance Income (UFE) = Total Interest GIL – P. V. of GIL Net Investment in Lease = GIL – UFE

Finance Vs Operating Lease Finance Lease: Any lease where the risks and rewards are substantially transferred to Lessee. Criteria for Finance Lease: (a) Ownership transferred at end of useful life (b) Lessee can purchase at price less than Fair Value. (c) Lease Term covers major useful life (d) Fair Value = P. V. of MLPs (e) Only Lessee can use the asset and not others

Classification of lease? Basis Fair value of the asset Finance lease Almost equal to Present value of Minimum lease payment Life of the asset Almost equal to Lease period Option to Available purchase the asset Price < fair value by lessee Time - at the end of lease period Risk of loss Borne by Lessee Nature of asset Special purpose Operating lease > Present value of lease rental > Lease period Not available Borne by lessor General purpose

Treatment – Lessee – Finance Lease (Same as Interest Suspense A/c) (a) (b) (c) (d) (e) Asset – Recorded at P. V. of MLPs Depreciation charged on above value Amount Due to Lessee is recognised as liability = Similar to HP Total Interest is recorded under Interest Suspense Account (Asset Side) Interest Exp. is recognised over lease term

Treatment – Lessor – Finance Lease (a) (b) (c) (d) (e) (f) Asset – Treated as sold No Depreciation Amount Due from Lessee is recognised as Asset at GIL = Similar to HP Price Total Interest is recorded under Interest Suspense Account (Liability Side) - UFE Interest Inc. is recognised over Lease Term Normal Profits recognised in year of delivery

Treatment – Lessee – Operating Lease (a) (b) (c) (d) Asset – Not Recorded Depreciation Not charged Instalments paid – Treated as expense No Interest Expense

Treatment – Lessor – Operating Lease (a) (b) (c) (d) Asset – Recorded as Fixed Asset Depreciation charged on cost Instalment received – Treated as Income No Interest Income