Page 157 - DMGT104_FINANCIAL_ACCOUNTING

Unit 8: Financial Statements

Explanation Notes

5. Revenue recognition is mainly concerned with the timing of recognition of revenue in the
statement of profit & loss of an enterprise. 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.
6. Sale of Goods
6.1 A key criterion for determining when to recognise revenue from a transaction
involving the sale of goods is that the seller has transferred the property in the
goods to the buyer for a consideration. The transfer of property in goods, in most
cases, results in or coincides with the transfer of significant risks and rewards of
ownership to the buyer. However, there may be situations where 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. Such cases may arise where
delivery has been delayed through the fault of either the buyer or the seller and the
goods are at the risk of the party at fault as regards any loss which might not have
occurred but for such fault. Further, sometimes the parties may agree that the risk
will pass at a time different from the time when ownership passes.
6.2 At certain stages in specific industries, such as when agricultural crops have been
harvested or mineral ores have been extracted, performance may be substantially
complete prior to the execution of the transaction generating revenue. In such cases
when sale is assured under a forward contract or a government guarantee or where
market exists and there is a negligible risk of failure to sell, the goods involved are
often valued at net realisable value. Such amounts, while not revenue as defined in
this Statement, are sometimes recognised in the statement of profit & loss and
appropriately described.

7. Rendering of Services
7.1 Revenue from service transactions is usually recognised as the service is performed,
either by the proportionate completion method or by the completed service contract
method.
(i) Proportionate completion method: Performance consists of the execution of more
than one act. Revenue is recognised proportionately by reference to the
performance of each act. The revenue recognised under this method would be
determined on the basis of contract value, associated costs, number of acts or
other suitable basis. For practical purposes, when services are provided by an
indeterminate number of acts over a specific period of time, revenue is
recognised on a straight line basis over the specific period unless there is
evidence that some other method better represents the pattern of performance.
(ii) Completed service contract method: Performance consists of the execution of a
single act. Alternatively, services are performed in more than a single act, and
the services yet to be performed are so significant in relation to the transaction
taken as a whole that performance cannot be deemed to have been completed
until the execution of those acts. The completed service contract method is
relevant to these patterns of performance and accordingly revenue is recognised
when the sole or final act takes place and the service becomes chargeable.

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