Revenue recognition on advance received

Others 3349 views 2 replies

Dipjyoti Majumdar

CA in service & CS. dipmaj@

3505 Points Posted on 25 January 2012

Friends

If a company has received an advance say during Fy 11-12 for rendering of service, should it transfer or how much to transfer to revenue on 31/03/2012 ? What are the factors to be considered ? I have gone through AS 9 but wanted to invite Your esteemed thoughts.

Regards,

Replies (2)

Yogesh Shah

Managing Corporate Finance

1051 Points Posted on 25 January 2012

Hi dipjyoti

Im sharing my views on ur question. Other expert views are eagerly awaited.

While answering this, two financial areas must be considered. First is AS – 9 ‘Revenue Recognition’ and latest boom in indirect taxes ‘Point of Taxation Rules’ since company has received an advance for rendering of services.

AS – 9 has said that revenue to be considered only when service is completed. It deals with receipts and receivables etc. but advance received by company is neither receipt for rendering services nor it is receivable. It is an advance, hence as per AS-9, it shall not be treated as income but it has to be shown as an advance in balance sheet.

In respect of aforesaid rules, invoice has to be issued within 14 days and service tax has to be paid etc. etc. This is all applicable for payment of service tax and it has nothing to do with revenue recognition.

Hence, in my view, such advance shall not be treated as revenue but will come in balance sheet as advance.

CA Suraj Lakhotia

IndigoLearn

4898 Points Posted on 26 January 2012

Para 12 of AS 9 states -

In a transaction involving the rendering of services, 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. Such performance should be regarded as being achieved when no significant uncertainty exists regarding the amount of the consideration that will be derived from rendering the service.

As per para 7, if the performance consists of more than one act, revenue is recognised on the completion of each act on the basis of proportionate completion method. If the performance consists of single act, revenue is recognised on the completeion of the act.