25 May 2020
The agreement between the parties involved in a transaction also determines the amount of revenue that will result from such a transaction.
And any uncertainties regarding the determination of such an amount and its related costs may have an impact on the timing of revenue recognition.
The two most important parameters that are considered in case of recognition of revenue are:
Revenue must be measurable It is not irrational to expect revenue collection at the time of sale or rendering of service However, there are cases where it is not possible to assess final collection of revenue with reasonable certainty at the time of making any claim. Such a claim may include asking for a price hike, export incentives etc.
In such cases, you need to postpone the revenue recognition to an extent of the uncertainty involved. Furthermore, you need to recognize revenue only when you’re reasonably certain about the time when final collection of revenue will be made.
However, if there is no uncertainty involved with regards to the final collection of revenue, you must recognize revenue at the time of sale or rendering of service. This is despite the fact that payments in such a transaction are made by installments.
The, there are cases when uncertainty arises after the time of sale or rendering of service. In such cases, it is suggested to create a separate provision that reflects the uncertainty. There is no need to adjust the amount of revenue with the amount of uncertainty.
CAclubindia
