The “Guidance Note on Revenue” issued by the ICAI does not deal with
|a) Sales revenue|
b) Revenue rendering service
c) Revenue from sale of fixed assets
d) Income from interest, dividend
The Correct Answer Is:
c) Revenue from sale of fixed assets
The “Guidance Note on Revenue” issued by the Institute of Chartered Accountants of India (ICAI) is a comprehensive document designed to provide guidance to accountants and financial professionals regarding the recognition and measurement of revenue.
Among the various aspects covered in this note, one key area it does not delve into is the treatment of revenue from the sale of fixed assets.
Explanation of Correct Answer (Option c):
The ICAI’s “Guidance Note on Revenue” primarily focuses on revenue recognition arising from ordinary business activities. Revenue from the sale of fixed assets, on the other hand, is a distinct category that is not considered part of routine operations.
It is typically treated separately in accounting standards and requires specialized treatment, often involving the calculation of gains or losses on disposal. The guidance note, therefore, omits this specific category as it falls outside the scope of revenue recognition from regular business operations.
Explanation of Incorrect Options:
let’s delve into further detail on why options a, b, and d are incorrect in the context of the ICAI’s “Guidance Note on Revenue”:
a) Sales revenue:
Sales revenue is a fundamental aspect of revenue recognition in any business. It represents the income generated from the sale of goods or services in the normal course of operations. The ICAI’s “Guidance Note on Revenue” extensively covers the principles and criteria for recognizing sales revenue.
This includes when to recognize revenue (at the point of delivery or over time), how to account for sales returns and allowances, and how to estimate and account for uncollectible accounts.
It also provides guidance on special considerations such as revenue from multiple-element arrangements and consignment sales. Understanding the nuances of recognizing sales revenue is crucial for businesses to accurately report their financial performance.
b) Revenue rendering service:
Revenue from rendering services is another vital component of revenue recognition. This pertains to income generated from providing services to customers or clients. The guidance note outlines specific criteria for recognizing service revenue, including when services are provided over time and when they are completed at a specific point in time.
It addresses key considerations such as determining the transaction price, allocating the transaction price to distinct performance obligations, and recognizing revenue as obligations are satisfied. Properly applying these criteria ensures that businesses report service revenue accurately and in compliance with accounting standards.
d) Income from interest, dividend:
Income derived from interest and dividends is a significant source of revenue for various entities, particularly those involved in financial activities or investments.
The guidance note provides clear direction on how to recognize and account for interest income, including the effective interest method for amortizing premiums or discounts on financial instruments.
It also covers the recognition of dividends when the right to receive payment is established. Understanding these principles is critical for entities engaged in financial transactions or investments to ensure proper reporting of interest and dividend income.
In conclusion, options a, b, and d are incorrect because they represent key components of revenue recognition that are thoroughly addressed in the ICAI’s “Guidance Note on Revenue.”
The note provides detailed guidance on the criteria and principles for recognizing sales revenue, revenue from rendering services, and income from interest and dividends. This comprehensive coverage equips accountants and financial professionals with the necessary knowledge to accurately report these types of revenue in financial statements.