Ind AS 18, “Revenue,” outlines the principles for the recognition, measurement, and disclosure of revenue. Revenue is defined as the gross inflow of economic benefits during the period arising from the ordinary activities of an entity. This standard ensures that revenue is recognized in a manner that reflects the transfer of goods or services to the customer, in accordance with the terms of the agreement and the completion of performance obligations.
Ind AS 18 has been largely replaced by Ind AS 115 (Revenue from Contracts with Customers), which provides a more comprehensive framework for revenue recognition. However, Ind AS 18 still applies to some transactions that do not fall under the scope of Ind AS 115, such as revenue from interest, royalties, and dividends.
Scope:
Ind AS 18 applies to all types of revenue, except:
- Revenue arising from transactions within the scope of Ind AS 115.
- Certain financial instruments, as covered by Ind AS 32, Ind AS 39, and Ind AS 107.
Key Principles of Revenue Recognition under Ind AS 18:
- Revenue from the Sale of Goods: Revenue from the sale of goods is recognized when the significant risks and rewards of ownership have been transferred to the buyer, usually at the point of delivery, when the buyer assumes control of the goods. The amount of revenue is measured at the fair value of the consideration received or receivable, net of returns, allowances, and discounts.
Example:
- A company sells goods worth ₹1,00,000 to a customer with delivery terms “FOB (Free on Board) destination” (i.e., the company retains ownership until goods reach the buyer). The company recognizes revenue when the goods are delivered to the customer.
- Revenue from the Rendering of Services: For service transactions, revenue is recognized by reference to the stage of completion of the transaction at the reporting date, as determined by the percentage of completion method or based on performance milestones.
Example:
- A consulting firm provides a service over several months and recognizes revenue based on the percentage of work completed during the reporting period.
- Revenue from the Use of Assets: Revenue is recognized for interest, royalties, and dividends on the basis of the accrual method, as and when it is earned.
- Interest: Revenue is recognized on a time proportion basis, considering the effective interest rate (the rate that exactly discounts the estimated future cash flows to the carrying amount of the financial asset).
- Royalties: Revenue is recognized when the entity has a right to receive payment, typically when the usage of the asset takes place.
- Dividends: Revenue is recognized when the entity’s right to receive the dividend is established.
- Measurement of Revenue: The amount of revenue is typically measured at the fair value of the consideration received or receivable. In some cases, revenue is measured as the cash price equivalent, adjusted for any discounts, rebates, or incentives.
Example:
- A company sells a product for ₹100,000 but provides a 10% discount for early payment. If the customer pays early, the revenue recognized is ₹90,000.
- Sale with Installment Payments: When goods or services are sold with installment payments, revenue is recognized at the time of sale, provided that the recognition criteria are met, such as the transfer of risks and rewards. However, if collectability is uncertain, revenue should only be recognized to the extent that the installment payments are received.
Example:
- A company sells a machine for ₹1,50,000, with a down payment of ₹50,000 and the remaining ₹1,00,000 payable in installments over two years. If the collectability of installments is not certain, the company recognizes revenue based on the amounts received.
- Revenue from Construction Contracts: Revenue from construction contracts is recognized using the percentage-of-completion method or the completed-contract method, depending on the circumstances. Under the percentage-of-completion method, revenue is recognized based on the proportion of work completed during the period.
Example:
- A construction company building a bridge recognizes revenue as the project progresses based on the cost incurred compared to the total estimated cost.
Key Disclosure Requirements:
- Revenue Breakdown:
Ind AS 18 requires entities to disclose revenue from the sale of goods, the rendering of services, and other types of revenue (e.g., interest, royalties, dividends) separately. This helps users of financial statements understand the nature of the business and the sources of revenue.
- Significant Judgments and Estimates:
Entities should disclose any significant judgments made in determining when revenue recognition criteria are met, particularly in the case of complex contracts or when multiple elements are involved (e.g., discounts, warranties, or rebates).
- Measurement of Revenue:
Details on how revenue is measured, including the method used for recognizing revenue from construction contracts or long-term service contracts, should be provided.
Example of Revenue Recognition from Sale of Goods:
| Transaction Details | Amount (₹) |
|---|---|
| Sale price of goods | 100,000 |
| Less: Discount (10%) | 10,000 |
| Net revenue recognized | 90,000 |
Example of Revenue from Service Rendering (Percentage of Completion):
| Transaction Details | Amount (₹) |
|---|---|
| Contract value | 500,000 |
| Percentage of completion (60%) | 300,000 |
| Revenue recognized | 300,000 |