Point of Recognition:
There is a broad difference in the point of time when one will recognize the revenue.
As per the AS, Revenue is to be recognized either at a point in time when the customer obtains control over the promised service. At times it can be recognized over a period of time as the customer obtains control over the promised service.
Under the GST, the time of supply is triggered when the invoice is raised, or payment is made whichever is earlier. This might lead to a situation wherein GST would be paid on the contract as per the date of invoice, but the revenue would not be recognized in the books because the customer may not have obtained necessary benefits from the contract.
What is the “Time of Supply” from the Accounting Standards Perspective?
Time of supply for sale of goods or for the rendering of services can be.
Sale of Goods:
Time of sale or supply shall be construed when the seller has transferred the property or ownership in the goods to the buyer for a consideration. This transfer generally results in the transfer of significant risks and rewards of ownership to the buyer. However, in some situations, the transfer of property in goods might not coincide with the transfer of significant risks and rewards of ownership. In such situations, the revenue is recognized at the time of transfer of significant risks and rewards of ownership to the buyer.
Rendering of Services:
Revenue from service transactions is usually recognized when the service is performed, either by:
a) Proportionate completion method: Generally, where the performance consists of the execution of more than one act; the revenue is recognized proportionately by reference to the performance of each act.
b) Completed service contract method: Where performance consists of the execution of a single action, or the 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 actions.
What is Time of Revenue Recognition from the GST Perspective?
As per the provisions of the CGST Act, the revenue recognition for the supply of goods and fir rendering of services is done as follows:
Supply of Goods:Revenue shall be recognized as per Section 12 as mentioned below
(a) on the date of issue of an invoice by the supplier or the last date on which he is required, under sub-section (1) of section 31, to issue the invoice with respect to the supply; or
(b) the date on which the supplier receives the payment with respect to the supply:
· Rendering of services: revenue shall be recognized as per Section 13 as mentioned below
The time of supply of services shall be the earliest of the following dates, namely:—
a) the date of issue of an invoice by the supplier, if the invoice is issued within the period prescribed under sub-section (2) of section 31 or the date of receipt of payment, whichever is earlier; or
b) the date of provision of service, if the invoice is not issued within the period prescribed under sub-section (2) of section 31 or the date of receipt of payment, whichever is earlier; or
c) the date on which the recipient shows the receipt of services in his books of account, in a case where the provisions of clause (a) or clause (b) do not apply.
Interest, Royalties and Dividends
When others use entity’s resources it gives rise to:
· Interest
These are the charges for using entity’s cash resources. It also includes any amounts due to the entreprise. Such accumulated amounts of interest are determined on the basis of time period for which it is outstanding and the rate of interest applicable.
· Royalties
Royalties are the charges for entity’s assets such as know how, patents, trademarks and copyrights. The royalties accrue according to the terms of the agreement between the parties.
This means that royalties are recognized on the basis of the terms of such an agreement. However, one even has the leeway to use some better method if the entity believes that there exists one.
· Dividends
Dividends are the rewards given on account of holding of investments in entity’s shares. Thus, dividends from investment in shares are not recognized in profit and loss statement unless a right to receive such a payment is given.
However, there can be cases when permission is required on interest, royalties and dividends from foreign countries. Furthermore, an uncertainty is expected in case of such remittance. In such cases, one needs to postpone revenue recognition.
Effect of Uncertainties in 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
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