CLFIN/013

IBS Center for Management Research

 
 
 

Revenue Recognition – What Went Wrong?

This caselet was written by Nagendra Kumar M V and Indu Perepu, IBS Hyderabad. It was compiled from generalised
experience, and is intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective
handling of a management situation.

© 2020, IBS Center for Management Research. All rights reserved.

To order copies, call +91 9640901313 or write to IBS Center for Management Research (ICMR), IFHE Campus, Donthanapally,
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CLFIN/013

Revenue Recognition – What Went Wrong?

Ramesh Kumar (Ramesh) worked as an accountant at Anirudh Furniture Spare Parts Limited
(AFSPL), a furniture spare parts manufacturing unit. At AFSPL, revenue was recognized after
buyers received the furniture and confirmed that they were happy with the quality and delivery of
the furniture. Ramesh, who had been working with AFSPL for a long time, followed this process.
Normally, it took one month for the buyers to get back to Ramesh to confirm the sale and payment
of money. It was after this that revenue was recognized.
Due to some emergency personal work, Ramesh had to go on leave for 2 months (April and May).
He therefore assigned the task of recording the revenue generation from sales to his junior,
Avinash Kumar (Avinash).
Avinash was not given any instructions about the process to be followed and was only told to
record the sales until Ramesh returned from his leave. Ramesh was on leave from April 01 to May
31 and Avinash recorded the transactions for the period. However, Ramesh on his return, received
complaints from some of the buyers regarding variation in the quantity and quality of goods
delivered. He asked Avinash to submit the statement of revenue for April and May. After looking
at the statement, Ramesh was unable to understand the actual revenue generated during the 2
months (Refer to Exhibit-I for the Revenue Recognition Statement Submitted by Avinash).
He called Avinash and asked him what process he had followed for recording the revenue during
April and May. Avinash said, “I have recorded the revenue once the buyers placed the order.”
Ramesh then understood that Avinash made a mistake in recording the revenue and started
rectifying it.

BACKGROUND

Ramesh, a commerce graduate, had more than 10 years’ experience in managing the accounting
processes in manufacturing concerns. He joined AFSPL Furniture Spare Parts Limited (AFSPL) in
2015. AFSPL manufactured and supplied spare parts for the assembling of various kinds of
furniture like tables, office chairs, cupboards, sofa sets, etc. It had been operational since 2010, and
was a key supplier to reputed furniture stores and manufacturers across several states in the
country. AFSPL products had gained a reputation for quality and for its timely processing and
delivery of the required quantity of goods to furniture stores and manufacturers.
At the time Ramesh joined AFSPL, the accounting system had not been properly established.
Ramesh took the initiative to streamline the accounting process, strictly following accounting rules
and regulations. He worked in close association with various suppliers of raw materials and buyers
to ensure the quality and timely delivery of products. He also established a reliable accounting
information system that would help in taking informed decisions on order management for
procuring raw materials and managing the orders received from the buyers.

THE REVENUE RECOGNITION PROCESS

For Ramesh to take an informed decision, determining the amount of revenue generated was
crucial. To determine the exact revenue generated, Ramesh considered the actual amount of
revenue generated only after the buyers received the goods and confirmed that everything was in

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  Revenue Recognition – What Went Wrong?

line with the terms and conditions specified. Normally, the order closure stage would depend on
the delivery period. AFSPL had buyers across the country. The timing of revenue recognition in
AFSPL financial statements thus varied depending on the location of the buyer (Refer to Table-I
for the Revenue Recognition for the Period of Three Months January 1 to March 31).
Table-I:
Revenue Recognition for the Three-Month Period January 01 to March 31
Confirmation
Order Process Delivery Date / Revenue Revenue
Order date Remarks
Value Period date Recognized Recognized
Date
2nd January Rs.100,000 15 days 30th January 31th January None Rs.100,000
th th th
10 January Rs.150,000 15 days 5 February 5 February None Rs.150,000
th th th
12 January Rs.200,000 15 days 10 15 February Buyer Rs.175,000
February returned goods
worth
Rs.25,000 due
to variation in
the order
19th January Rs.200,000 15 days 10th 10th February Goods worth Rs.190,000
February Rs.10,000
found to be
defective
24th January Rs. 15 days 12th 18th February None Rs. 125,000
125,000 February
1st February Rs. 75,000 10 days 25th 25th February Goods worth Rs.70,000
February Rs.5,000
returned due
to prior
agreement as
per terms of
return policy
9th February Rs.85,000 10 days 5th March 5th March Goods worth Rs.80,000
Rs.5,000
found to be
defective
13th February Rs.80,000 10 days 10th March 10th March None Rs.80,000
th th th
20 February Rs.90,000 10 days 15 March 15 March Goods worth Rs.80,000
Rs.10,000
returned due
to prior
agreement as
per terms of
returns policy
26th February Rs.95,000 10 days 16th March 25th March None Rs.95,000
rd th
3 March Rs.300,000 20 days 5 April yet to receive -
th th
8 March Rs.400,000 20 days 10 April yet to receive -
th th
15 March Rs.450,000 20 days 18 April yet to receive -
th st
28 March Rs.500,000 20 days 1 May yet to receive -
Source: Prepared by the Author

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  Revenue Recognition – What Went Wrong?

RECONCILING THE REVENUE GENERATION

Once Ramesh understood the mistake Avinash had made, he started to reconcile the revenue
figures submitted by his assistant by verifying the orders received and cross verifying with the
buyers to determine the actual revenue figures generated for the 2-month period.

DISCUSSION QUESTIONS

1. Discuss the concept of revenue recognition in the process of accounting and how it ensures
accuracy in the decision making process.
2. Discuss the guidelines specified in Accounting Standard (AS) – 9 (Revenue Recognition) in
determining the actual revenue generated from the sale of goods.
3. Prepare a reconciled revenue recognized statement as per the revenue recognition policy
followed by Ramesh Kumar

Exhibit-I:
Revenue Recognition Statement Submitted by Avinash 1st April to 31st May
Order Date/
Revenue Order Process Delivery Revenue
Confirmation Remarks
Recognized Value Period Date Recognized
Date
2nd April Rs.50,000 8 days 25th April 27th April Buyer returned Rs.50,000
goods worth
Rs.5,000 due to
variation in the
order
10th April Rs.75,000 10 days 31th April 03rd May No Rs.75,000
12th April Rs.100,000 10 days 31th April 4th May No Rs.100,000
th th th
19 April Rs.100,000 10 days 5 May 6 May No Rs.100,000
th th th
24 April Rs. 75,000 10 days 10 May 13 May Goods worth Rs. 75,000
Rs.10,000
found to be
defective
1st May Rs. 50,000 8 days 15th May 18th May Rs. 50,000
9th May Rs.40,000 7 days 25th May 30th May Rs.40,000
th th nd
13 May Rs.40,000 7 days 31 May 02 June Goods Worth Rs.40,000
Rs.5,000
returned due to
prior agreement
in terms of
returns policy
20th May Rs.45,000 7 days 5th June No Rs.45,000
26th May Rs.50,000 8 days 15th June No Rs.50,000
Source: Prepared by Author

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