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ANNOUNCEMENT
FOR THE INFORMATION OF THE MEMBERS
Treatment of inter-divisional transfers |
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Attention of the members is invited to the
definition of the term 'revenue' in Accounting Standard (AS) 9,
Revenue Recognition, issued by the Institute of Chartered Accountants
of India, which is reproduced below:
"Revenue is the gross inflow of cash, receivables
or other consideration arising in the course of the ordinary
activities of an enterprise from the sale of goods, from the
rendering of services, and from the use by others of enterprise
resources yielding interest, royalties and dividends. Revenue is
measured by the charges made to customers or clients for goods
supplied and services rendered to them and by the charges and
rewards arising from the use of resources by them. In an agency
relationship, the revenue is the amount of commission and not the
gross inflow of cash, receivables or other consideration." (emphasis
supplied)
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The use of the word 'enterprise' in the definition
of the term 'revenue' clearly implies that the transfers within the
enterprise cannot be considered as fulfilling the definition of the
term 'revenue'. Thus, the recognition of inter-divisional transfers as
sales is an inappropriate accounting treatment and is inconsistent
with Accounting Standard (AS) 9, Revenue Recognition. This aspect is
further strengthened by considering the recognition criteria laid down
in AS 9. Paragraphs 10 and 11 of AS 9, reproduced below, provide as to
when revenue from the sale of goods should be recognised:
"10. Revenue from sales or service transactions should be
recognised when the requirements as to performance set out in
paragraphs 11 and 12 are satisfied, provided that at the time of
performance it is not unreasonable to expect ultimate collection. If
at the time of raising of any claim it is unreasonable to expect
ultimate collection, revenue recognition should be postponed.
11. In a transaction involving the sale of goods, performance should
be regarded as being achieved when the following conditions have been
fulfilled:
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the seller of goods has transferred to the buyer
the property in the goods for a price or all significant risks and
rewards of ownership have been transferred to the buyer and the
seller retains no effective control of the goods transferred to a
degree usually associated with ownership; and
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no significant uncertainty exists regarding the
amount of the consideration that will be derived from the sale of
the goods."
Since in case of inter-divisional transfers, risks
and rewards remain within the enterprise and also there is no
consideration from the point of view of the enterprise as a whole, the
recognition criteria for revenue recognition are also not fulfilled in
respect of inter-divisional transfers |
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