This document discusses types of revenue and revenue recognition for pharmaceutical companies. It outlines several types of revenue including sale of products, sale of services, export incentives, technology fees, and unbilled revenue. It describes how each type of revenue is recognized according to accounting standards. For example, revenue from sale of products is recognized upon dispatch while revenue from services is recognized upon completion or as milestones are met. The document also discusses documentation requirements for domestic and export sales.

1. PHARMACEUTICL INDUSTRY
 Types of revenue & revenue recognition
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2. Section Content
1 Introduction
2 AS - 9
3 Types of revenue
4 Revenue Recognition
5 Documentation
6 Points to be focused in audit
© Grant Thornton India LLP. All rights reserved.
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3. Section 1
Introduction:

4. Introduction
• One of the biggest businesses in the world
• Spending on prescription drugs globally- $800 Billion
in 2011
• $300 Billion market was grabbed by USA in 2011
• America's spending in drugs increased by 2.3% in
2011
• Market of drug spending to jump 28% in 2015
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5. Introduction
INDIA
• World's 3rd largest industry by volume and
14th in terms of value.
• Total market is $12 Billion
• $3.1 Billion growth compared to 2009-10
• Estimated to reach on growth of $15.4 Billion
by 2015
.
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6. Section 2
AS - 9: Revenue Recognition(Summary)

7. REVENUE
Gross Inflow of cash, Receivable
or other consideration arising in
the course of ordinary activities:
Use of enterprise
Sale Of Goods Rendering Of Services
Resources by others
Transfer of Property • Proportionate • Interest
In goods Completion
of services Method • Royalties
Significant Risks
and Rewards are • Completed Service • Dividends
transferred Contract Method
Common for all three groups
a) Measurability of amount, b) Certainty of collection c) Disclosure of
circumstances when revenue recognition is postponed

8. Definitions of certain expressions in the previous slide
Significant Risks & Rewards of
Ordinary Activities
ownership
 Activities undertaken as part of  The major risks & rewards associated
business & with the goods must be transferred.
 Related activities engaged in Ex: When delivery is made,
• furtherance of When delivery is delayed at
• incidental to buyers request (How ever,
• arising from the item must be on hand,
these activities. identified and ready for
delivery)
Property in goods
 Ownership in goods

9. Revenue recognition when delivery of goods sold subject to conditions:
a. Sale on Approval:
When buyer confirms his desire to buy goods.
b. Consignment Sales:
When the goods are sold by consignee to a third party.
c. Cash on delivery sales:
When cash is received by the seller or his agent.
d. Special order and shipments:
When the goods are manufactured, identified and ready for delivery to the
buyer by the third party.

10. Recognition of
Revenue -
Rendering of Services
Completed Service Proportionate
Method Completion Method
Recognize Revenue Recognize Revenue by
when the sole or final reference to performance
act takes place and of each act – on the
the service becomes basis of contract value /
chargeable. associated cost /No of
acts

11. Recognition of Revenue-Others
• Interest:
Time proportion basis, taking into account:
o Amount Outstanding, &
o Rate Applicable
• Royalties:
Accrual basis, in accordance with terms of agreement
• Dividends:
When owner’s right to receive payment is established

12. Section 3:
Types of revenue mainly involved
1. Sale of product
2. Sale of Services
3. Export Incentives
4. Technology/know-how/fees
5. Unbilled revenue

13. SALE OF PRODUCTS
• Revenue from sale of products is recognized on
the basis of actual dispatches.
• Transfer of significant risk and reward of
ownership to buyer
• Reasonable to expect that the ultimate collection
will be made.
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14. SALE OF SERVICES
• On completion of services
• Recognized on the basis of contract with
customer,
• and, agreed milestones are achieved.
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15. EXPORT INCENTIVES
• Revenue from export incentives is recognized
on the basis of actual dispatches
• Recognized on the basis of Bill of lading/Airway
Bill.
• when there is no uncertainty regarding the
ultimate collection of export proceeds
• Right to receive is established
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16. Technology/ Know-how/ Fees
• As and when the right to receive such income is
established
• or, Accrual basis
• When performance obligation is completed
• Risk and reward of ownership is transferred to
customer.
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17. UNBILLED REVENUE
• Recognized to the extent that is probable that
the economic benefits will flow to the company
• Revenue can be reliably measured.
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18. Section 4:
Revenue Recognition
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19. REVENUE RECOGNITION
CALCULATION
Percentage Completion method
• % of work completion to be calculated as below-
Actual Hours
Estimated Hours
• Material will be taken as 100% of TOTAL MATERIAL ISSUED.
• Machining Charges will be taken on % Completion of Estimated
machining charges
• Profit will be taken as per policy. viz. Cost plus, % on sales, etc.
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20. REVENUE RECOGNITION
CALCULATION
• To be shown in Balance sheet under Current Assets as UNBILLED
WIP. i.e. only machining and material cost only.
• No profit element in unbilled WIP.
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21. DOCUMENTATION
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22. DOCUMENTS TO BE MAINTAINED IN CASE OF DOMESTIC & EXPORT
SALES
Documents for both indigenous and export sales are:
• Customer PO
• Sales order on the basis of customer PO
• Certificate of Analysis
• Quality review report
• Packing list
• Delivery Challan/Note
• Excise invoice
Additional documents for export sales are:
• Manufacturer’s certificate
• Certificate of shipment
• Shipping order
• Cart/Lorry Tickets
• Shut out advice
• Shipping advice
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